Protests in the streets of Iran could not come at a worse time for the regime as President Trump must decide again whether waive US sanctions on Iran’s oil exports by a January 12 statutory deadline.
Renewed US sanctions would not only result in an oil price spike by removing nearly 1 million barrels per day of Iranian crude exports from global markets, but would likely cause the entire nuclear deal to unravel.
In a December 21 client note, we said “we believed there is an increased likelihood that Trump will not issue another oil sanctions waiver.” While Trump has reluctantly issued prior sanctions waivers on May 18 and September 14, those deadlines occurred before the President decertified the Iran Nuclear Deal on October 13.
The protests began after our December note but we think they only increase the odds that Trump doesn't waive sanctions again.
In our December 21 note, we suggested to look for Trump tweets in the following weeks on Iran as a risk indicator of the sanctions waiver decision. Trump started the New Year with some tough talk on Iran and the Obama nuclear deal once again calling it a “terrible deal” that “All of the money that President Obama so foolishly gave them went into terrorism and into their [the regime’s] ‘pockets.’” See Trump’s relevant tweets from this morning and January 1 below.
Trump’s advisers want him to waive sanctions again and give more time for a legislative fix or diplomatic fix working with EU but Trump has his own views as we saw with the decertification in October. Trump has grown impatient with the lack of progress on the legislative and diplomatic fronts since he decertified the deal.
The protests make it hard to keep the status quo on Iran as the January 12 date approaches.
There are also advisers on the Trump national security team, as well as in the US foreign policy community, arguing that US action here (not waiving sanctions) may provoke or help the hardliners in Iran. But we believe Trump views those arguments as lacking validity as he sees the hardliners and the current regime as one in the same.
Another possible alternative to denying the sanction waivers is to decertify the deal again on the January 13 deadline (every 90 days). We think another decertification decision is already expected but wouldn’t have any real impact on sanctions. It would however restart the legislative clock again for a legislative fix and potentially offer public relations value to slam the regime amidst the protests. If he goes this route, it would set up a real showdown for the next sanctions waiver deadline in May.
While we are not sure Trump is patient enough to allow another two months for the “terrible deal” to be fixed, we are quite certain he will not agree to waive sanctions again without a fix when the next waiver deadline arrives on May 12. Another decertification on January 13 may be the last chance to salvage the Iran deal.
But we think the Iran nuclear deal and US waivers of oil sanctions are on life support.
A 2011 US law provided the President with the ability to waive sanctions every 120 days if it is in the national security interest. An outright repeal or amendment of the sanctions would require congressional action. Therefore President Obama used his executive authority under the law to waive oil sanctions on January 18, 2017 just before he left office.
While US law allows for a Presidential waiver for Iran oil sanctions, the Joint Comprehensive Plan of Action (JCPOA) Iran nuclear deal requires it. The lifting of oil sanctions is one of the major components of the nuclear agreement with Iran, and therefore, a US refusal to issue another waiver would not only impact oil markets but would likely see the deal unravel.
Like the US law requiring waiver sanctions every 120 days, the 2015 Iran Nuclear Agreement Review Act (INARA) requires the President to certify Iran’s compliance under the JCPOA every 90 days.
President Trump has been frustrated that he is required under the law to certify and waive sanctions for an agreement that he views as the “worst”, “one-sided”, “an embarrassment to the United States”, and “cover for the eventual construction of a nuclear program.” As a result, Trump delivered a tough anti-Iran nuclear deal speech at the United Nations in September and then decertified the nuclear deal on October 13.
Trump’s decertification of the nuclear deal under INARA triggered a 60-day period for Congress to consider legislation on a fast-track basis that has the additional benefit of not subject to a Senate filibuster. Trump also hoped his decertification would prompt European allies to be cooperative and kick off renegotiations of the deal. To date, neither has happened.
On the legislative front, Senators Bob Corker and Tom Cotton have developed legislation that strengthen the deal (from the US viewpoint) by requiring additional compliance measures on ballistic missiles and the post-2025 period after the deal concludes. But the legislative effort has not attracted support by Senate Democrats hoping to preserve the original Obama deal. The Iranian protests further complicate the US legislative efforts.
As we wrote in an October 13 client note, “we believe US sanctions on Iran’s crude exports, as well as insurance and shipping sanctions, are likely to be reimposed in early 2018.”
When he decertified Iran’s compliance under the nuclear deal, Trump twice made it clear that if the deal’s serious flaws were not addressed, he will cancel the deal and reimpose sanctions. “In the event we are not able to reach a solution working with Congress and our allies then the agreement will be terminated. It is under continuous review and our participation can be called by me as our President at any time,” Trump said on October 13.
Renewed US nuclear sanctions on Iran will be the biggest geopolitical catalyst for higher oil prices in years. When sanctions were lifted in 2016, Iran added about 1 million barrels a day (b/d) of crude exports to global markets. Therefore, if Trump does not issue another sanctions waiver on January 12, Iranian crude exports of at least 800,000 b/d would likely be removed from the market and thus spike oil prices.
While EU governments have stated they will not go along with a unilateral US action to re-impose sanctions, European energy companies with increasing US economic exposure would not risk violating US sanctions. In addition the Iran protests put the EU governments in a tough position defending the deal amid reimposed US sanctions.
On January 13, Trump is once again required to certify Iranian compliance due under INARA. We expect him to again decertify the deal that will trigger another two-month window for Congress to move legislation and for allies to engage in renegotiations over the deal.