Takeaway: Countries are expected to reduce crude import volumes from Iran during wind-down period & sanctions go into “full effect” on Nov 5.

Click here to listen to a replay of a conference call on Wednesday, May 8, 2018 with Hedgeye Senior Energy Policy Analyst Joe McMonigle summarizing the Trump Iran oil sanctions, the impact on oil markets and next steps.

The political risk of lower oil supply from Iran became a reality Tuesday after President Trump signed a National Security Presidential Memorandum (NSPM) that withdraws the US from the Iran nuclear deal and reinstates all US nuclear sanctions on the Iranian regime subject to certain 90-day and 180-day wind-down periods.

The following are some key points from the call:

  • Trump said the US would impose the “highest level of economic sanctions” on Iran adding that “any nation that assists Iran will also be subject to sanctions.”  This is an important point as the EU is seeking exemptions from sanctions in order to preserve the nuclear deal.
  • While the May 12 deadline was just about oil sanctions but Trump went further and withdrew the US from the deal and reimposed all nuclear related sanctions on Iran.
  • Countries are expected to reduce crude import volumes from Iran during wind-down period & sanctions go into “full effect” on November 5, 2018
  • The law provides for exemptions from sanctions but we do not believe there will be a great number of exceptions granted for countries or companies from the Trump team under the reimposed sanctions.  Further sign that exemptions will be scarce: Treasury announced yesterday that it was revoking the licenses for Boeing ($17B) and Airbus ($19B) for aircraft sales with Iran.
  • Iran has said that if the EU and other partners cannot guarantee the benefits (ie oil revenue, airplane sales) of the deal, then it would also exit and resume the nuclear program.  Consequently, the EU will likely be forced to reimpose sanctions again on Iran – so this is another key catalyst for oil markets.  Even though we think European energy companies will abide by US sanctions, if the EU joins down the road – it will be a psychological event for oil markets.
  • Saudi Arabia released a statement saying they would “mitigate” any supply disruptions. Our view is there won’t be Saudi mitigation at $80 but possibly if oil prices go closer to $90.
  • The June 22 OPEC Meeting will see extensive discussions about Iran Sanctions and whether to end the production cut deal earlier than planned. There will be a ton of headline risk here. We expect the Saudi’s to resist this move, and instead say they will pursue a wait-and-see approach if market conditions warrant.