Secretary of State Rex Tillerson’s departure had been rumored for months. By all accounts, Tillerson was willing to stick it out but Trump was not.
Trump explained this morning that he and Tillerson disagreed on policy issues and highlighted the Iran nuclear deal. “We got along actually quite well but we disagreed on things. When you look at the Iran deal: I think it’s terrible; I guess he thinks it was ok. I wanted to break it or do something and he felt a little bit differently so we were not thinking the same,” Trump told reporters.
Trump’s decision to replace Tillerson surely signals the end of the Iran nuclear deal. While a reluctant Trump issued another waiver of Iran oil sanctions in January, he warned that it was the last waiver unless the agreement is changed to address his concerns.
Trump’s decision will set up a showdown at the next waiver deadline on May 12. Tillerson was pursuing a separate side agreement with the EU to address Iran’s ballistic missile program but there was little sign of progress and unlikely that Iran would agree. French President Emmanuel Macron will make a state visit to Washington in late April just in time to lobby Trump to renew the oil sanctions waiver and preserve the nuclear deal.
In our view, it is unlikely that Congress or the Europeans will take any meaningful action to modify the agreement. As a result, there is significant risk of snap-back US oil sanctions on Iran on May 12, and the nuclear deal remains on life support.
Re-imposing US oil sanctions on Iran would put as much as one million barrels a day of Iranian crude exports at risk of being removed from global markets. Such a move would inject significant geopolitical instability in oil markets and likely send oil prices higher.
EU governments will probably not go along with US sanctions but European energy companies ,who have significant economic exposure in the US, will likely adhere to US sanctions. The EU alone imports about 500,000 barrels a day of Iranian crude and has historically been a major Iranian export market. The US would also lean heavily on Japan and South Korea to also honor sanctions, and we believe they will go along due to the North Korea situation.
Trump detests that he has to put his personal stamp of approval on a deal he views as “terrible.” Under US law the President must make a decision to waive Iran sanctions every 120 days in order for the US to keep its commitment under the Iran nuclear deal.
Trump’s new Secretary of State-nominee Mike Pompeo is aligned with Trump on the Iran policy and had been a leading opponent of the Iran nuclear deal when he was a Member of Congress.
Venezuela Sanctions
There is the potential for a change in plans for the US to impose tougher sanctions on Venezuela. Tillerson had emerged as a strong advocate for US sanctions on Venezuela crude sales and did an end-run around the White House staff to get Trump’s approval. Tillerson’s departure might change the outlook for Venezuela oil sanctions as the National Economic Council (NEC) staff was trying to walk back Trump’s approval of the policy and replace it with less-harsh sanctions on individuals. The NEC is concerned about the impact on US gulf refiners who rely on the heavy Venezuelan crude that is not easily replaced. However, the earlier departure of NEC Director Gary Cohn may have also sidelined the NEC effort.
Venezuela President Nicholas Maduro had scheduled new presidential elections on April 22 and recently announced the elections would be delayed until May 20 out of concern about talk of US sanctions.
Pompeo has said very little about Venezuela so not much is known about his views but they are likely to have a major influence on on-going policy discussion regarding oil sanctions.
President Trump has announced that he will attend the Summit of the Americas on April 13-14 in Lima, Peru, and we expect the US policy on Venezuela to be finalized going into this international meeting. Maduro, who is isolated in Latin and South America, has not been invited to the Lima meeting but he has made comments suggesting that he will crash the meeting. It is worth noting that former President Obama had first met former Venezuelan President Hugo Chavez at a past Summit of the Americas meeting.
NOTE: Hedgeye is hosting a lunch in New York and Boston on Thursday and Friday this week and will discuss these important geopolitical issues as well as preview what is next for the OPEC production cut agreement. Our special guest speaker is Chakib Khelil, former OPEC President and former Algerian energy minister. Details are below. Contact to reserve your spot.
Thursday, March 15 – Lunch at 12:30 pm, The National, 557 Lexington Avenue, New York, NY
Friday, March 16 – Lunch at 12:30 pm, The Palm, 100 Oliver Street, Lobby Level, Boston, MA
