Takeaway: As we forecasted months ago, Trump Administration and new national security team want tough implementation on US sanctions on Iran

The US State Department delivered a message for oil markets today saying it should be prepared for Iran oil sales “to go to zero,” according to a background briefing held for reporters on the reimposition of Iran nuclear sanctions.

“We view this as one of our top national security priorities. I would be hesitant to say zero waivers ever. I think the predisposition would be no, we’re not granting waivers,” senior state department official said today.

President Trump and his new national security team are signaling tough implementation of reimposed Iran sanctions in contrast to the more nuanced application by the Obama Administration that simply asked other nations to significantly reduce oil purchases.  Instead, the senior state department official said today that “we are asking them [other countries] to go to zero [oil purchases from Iran], absolutely yes.” 

A full transcript of the background briefing is available here.

Less than 48 hours after OPEC and Russia said it would increase production, the US government today signaled another policy catalyst for higher prices. Markets settled lower Monday after OPEC’s decision but are sharply higher today after the State Department announcement to get tougher on Iran oil sales.

Hedgeye has been forecasting for months that the Trump team would take a different and tougher approach to sanctions and also that the impact on oil markets would be higher.  After Trump reimposed sanctions on May 8, we said in a Hedgeye client note:

“We do not believe there will be a great number of exceptions for countries or companies under the reimposed sanctions.  The law provides for exceptions for “significant reductions” but it is a subjective standard.  The Obama Administration defined a “significant reduction” as 20 percent but we expect the Trump team to have a tougher standard on the percentage of reduction in addition to other factors relating to sanction compliance.”

 

Our view is that reimposed US nuclear sanctions will remove nearly 1 million barrels per day (b/d) that were added by Iran after the nuclear deal was implemented. We expect this number will be contributed from zero oil purchases from companies in Europe, Japan and South Korea.  China and India are wildcards but several Indian refiners have said they will not buy Iran oil after US sanctions. We expect China to continue buying oil from Iran but perhaps at pre-Iran deal levels. We think it is a mistake to assume China will buy up additional Iranian oil lost to US sanctions. China wants to diversify its oil imports and there are also political considerations. China will want to express independence from the US policy but it will not want to poke Trump in the eye either.

Full US sanctions go into effect in November. A black market for Iran oil sales will likely develop again through Iraq’s southern port but we also believe the US government will be tracking these sales and enforcing sanctions on buyers.