Editor's Note: Below is an abridged research note by Hedgeye Energy Policy analyst Joe McMonigle. If you would like access to his institutional research email sales@hedgeye.com.
Oil Markets Should Expect More US “Maximum Pressure” & Iran Misbehavior
President Trump pronounced at a Tuesday cabinet meeting that “a lot of progress has been made [with Iran] and “they’d like to talk.” His comments sent oil prices down amid speculation that Iranian crude might soon return to global markets.
Tehran quickly issued a denial about negotiations and prices appeared to normalize.
Media reports and some analysts have interpreted a softening in Trump’s position since he nixed an air strike on an Iranian anti-aircraft installation that struck down a US surveillance drone. We think this is a mistake.
US officials we consulted believe US sanctions have been highly effective in cutting Iran’s oil revenue and creating difficulty for Iran’s economy. They believe the resulting progress is the apparent recent noises from some factions in Iran about negotiations.
But Iran’s official position is that there will be no negotiations unless US sanctions are lifted or suspended. Since the Trump Administration believes it was a mistake to suspend some sanctions during the Obama Administration’s negotiations with Iran, there is no chance Trump will agree to suspending or lifting sanctions before there is a deal.
The US believes its leverage is strong and will only get stronger in the months ahead. In fact, we are hearing that additional measures may be imposed on Iran as early as next month to ramp up the maximum pressure campaign.
Therefore, instead of negotiations, we think oil markets should be prepared for more US sanctions that will in turn generate more Iran misbehavior, especially with regard to oil transport in the Strait of Hormuz.
As we said in previous notes, if the US has a “maximum pressure” Iran policy, Iran is responding with a “maximum chaos” plan in the form of tanker and pipeline attacks, as well as recently increasing enrichment above limits agreed to under the JCPOA.
Iran believes it can hurt Trump politically if oil prices rise from geopolitical threats. In addition, Iran has calculated that Trump will avoid a war at all costs, and so increasing the risk of military conflict will bring a change in Trump’s attitude on lifting sanctions or negotiating with a suspension of sanctions.
We think this is a miscalculation but regardless it signals even greater political risk in the heart of the oil producing Gulf and in a major transport corridor.
bottom line
In our view, oil markets should expect more instability in the Gulf from political risk in the near-term and less focus on negotiations or cooling tensions.
