On Monday President Trump stated in a press conference with the Italian Prime Minister in Washington that he would " certainly meet with Iran if they wanted to meet” adding that he had “no preconditions.”
Minutes later some oil market watchers and media outlets began speculating that the President’s comment is a sign that his administration is softening its position on Iran oil sanctions. In our view, it would be a mistake to interpret Trump’s comments as a change in US policy on Iran; the market should not expect any backtrack on Iran oil sanctions.
It is noteworthy that soon after the press conference on Monday, both Secretary of State Pompeo and National Security Advisor Bolton were walking back the “no preconditions” part of Trump’s answer to a reporter’s question on Iran.
Add the Iran meeting comment to the list of other perceived signals some analysts and media commentators have latched onto to suggest some potential new change in Trump’s position on Iran oil sanctions. The last several weeks saw the same group scrutinizing comments from top State and Treasury Department officials about waivers and interpreted it to mean the administration was open to providing waivers from Iran sanctions. The ongoing analysis about a perceived backtracking on the Trump administration Iran policy seems to not only be forecasting an outcome but hoping for a specific outcome.
We’ve been consistent with our time-stamped forecast from a year ago that Trump will re-impose sanctions on Iran oil sales with tough implementation and no waivers. Since our initial forecast, Trump has decertified the Iran deal last October and reinstated oil sanctions in May. Furthermore, the State Department and the National Security Advisor have said on the record that there will be “zero waivers.” Still, many market watchers and analysts keep doubting Trump’s consistent Iran policy despite clear evidence to the contrary.
So we will address the two issues raised yesterday: 1) any potential for a Trump- Iran meeting; and 2) continued speculation that high gasoline prices before the election translates into Trump walking back or softening Iran sanctions.
First on the meeting itself, Trump’s comments were in response to a reporter’s question and not in prepared remarks so it was not a planned change in policy. And as we already pointed out, Pompeo and Bolton splashed cold water on the “no preconditions” part later in the day.
In our view, Trump likes the high profile world press attention he gets from these types of meetings (ie North Korea and Putin). So we are not surprised he sees an Iran meeting as another such opportunity. It has already been widely reported that the Administration sought a meeting last fall with Iran’s President during the UN General Assembly but was rebuffed by Iran.
In addition, Iran won’t be inclined to meet or make the types of concessions or changes that Trump is seeking in a new Iran deal. It takes two to tango, and Iran doesn’t dance. So we think it is very unlikely a meeting takes place, and Iran has said as much in the hours since Trump’s comments.
Second, the theory behind why some market watchers continue to second-guess Trump’s tough implementation of US oil sanctions is that it is or will cause higher gasoline prices before the US midterm congressional elections.
While we agree the politicians pay close attention to gasoline prices, we don’t see it changing the Iran policy. First, we think gasoline prices in the US will retreat after Labor Day after the high demand summer season and will relieve some of this political pressure.
Second, Trump views high oil prices as Saudi Arabia’s problem -- in exchange for his tough action on Iran. The State Department has been on a road show over the last several months meeting with countries that import Iranian oil. They have made it clear that the US is not providing waivers for contractual obligations.
In the administration’s view, if other countries say they need the oil, the White House tells them to call Saudi Arabia. Indeed, the White House and the Saudi government have been in close coordination on trying to moderate high prices through increased production. OPEC’s decision, led by Saudi Arabia and the UAE, in June to increase production was largely in response to pressure from Trump.
According to OPEC data, Saudi Arabia increased production in June by about 400,000 barrels a day, and we believe they are prepared to go higher if necessary. However the Saudis contend there is not much demand for additional oil supplies from customers and the market is adequately supplied.
Lastly, we have already written a note on the speculation regarding Trump tapping into the Strategic Petroleum Reserve (SPR) to moderate prices. While there is no immediate plan for a SPR release this summer, we could possibly see one close to the election, and it could easily be justified on policy grounds by continued decreases in Venezuela production. But it will depend largely on gasoline prices in October.
The Iran oil sanctions don’t go into effect until after the election and Trump has several other options for addressing high oil prices. But backtracking on his Iran policy and sanctions on Iran oil sales is not an option for Trump.
