The mainstream media and political commentators have been focused today on President Trump’s tweet to Iran’s President Rouhani.
While many think Trump's tweet is about changing the subject from last week's Helsinki summit, we think it's a miscalculation to view it as simply a public relations tactic. This is not the “rocket man” diplomacy that Trump used with North Korea. Rather, Trump has been very consistent when it comes to his Iran policy but the market keeps underestimating him.
There are two big implications for oil markets.
First and foremost is the free flow of oil and commerce in the Strait of Hormuz. President Rouhani's comments this weekend suggesting that Iran would block other oil shipments in the strait are not isolated as many others in Iran have made similar statements. Moreover Iran’s supreme leader Ayatollah Khamenei later “hailed” Rouhani’s threat that “if Iran’s oil export is blocked, no other country in region will export oil either.”
This rhetoric and threats about Hormuz oil shipments were bound to get Trump's attention, and as a result, it may get hot in August for oil markets. The increased tension alone will make oil markets nervous, and should there be a military incident, oil prices would likely see sharp spike.
Second, Trump’s tweet is yet another sign that the market should expect tough implementation of Iran oil sanctions. Even last week, there were still analysts and media outlets who were forecasting that the US will issue waivers from Iran oil sanctions to mitigate high oil prices while the administration has been quite clear that there will be zero waivers.
As we have said in client notes since last year, Trump is focused on Iran's oil revenue as a means to cut off funding for Iran's destabilizing activities in the region. He is focused on the oil revenue and that is the policy behind reimposing oil sanctions. We maintain our forecast from May to expect tough implementation of Iran sanctions and zero waivers. As a result, we expect close to 1 million barrels per day of Iran oil exports to be removed from global markets.