President Donald Trump is expected Tuesday to announce renewed sanctions on Iran, but to say the details remain uncertain would be an understatement.
A CNN report that Trump will allow sanctions to go forward, but won’t yet formally withdraw from the multilateral nuclear agreement that allowed Tehran to resume oil exports sent crude futures tumbling late Tuesday morning. But it was quickly followed by a New York Times report that said Trump had told President Emmanuel Macron he plans to announce the withdrawal of the U.S. from the deal. Oil then took back some lost ground.
Growing expectations Trump would take the U.S. out of the deal and renew sanctions helped drive oil prices to their highest levels since 2014, with West Texas Intermediate crude
Read: Here’s what sanctions on Iran could do to global oil supply and prices
West Texas Intermediate crude
CLM8, -2.19%
the U.S. benchmark, on Monday closed above $70 a barrel for the first time since 2014, then pulled back in electronic trading after Trump tweeted that he would announce his decision at 2 p.m. Eastern on Tuesday. WTI futures were off 2.4% at 69.03 a barrel in recent trade, while Brent crude futures
LCON8, -1.60%
the global benchmark, were off 1.7% at $74.87 a barrel.
U.S. stocks were slightly lower, with the S&P 500
SPX, -0.22%
and the Dow industrials
DJIA, -0.20%
both down 0.1%.
ead: Oil prices have surged above $70—here are 4 key reasons behind the rally
Here’s a look at the potential scenarios and what they would mean for the oil market.
The most likely scenario
The scenario outlined by the Times report has been seen as the most likely move, in the view of several analysts. It would see Trump announce the U.S. is exiting the treaty, known as the Joint Comprehensive Plan of Action, or JCPOA, while declining to issue an extension of waivers on economic sanctions on Iran.
In this scenario, Trump would also place secondary sanctions on Iran’s central bank and require buyers of Iranian crude to cut purchases by a certain percentage over a specified period, noted Cliff Kupchan, chairman of Eurasia Group, a political risk consulting firm, in a Monday note. Eurasia Group saw leaving the JCPOA and reimposing oil sanctions as its base case, with a 40% chance.
“This scenario is most likely because Trump views Iran in the absolutely evil category, and he feels viscerally about it,” Kupchan said. It would also lay the groundwork for a strategy favored by national security adviser John Bolton to “break the…back” of the Iran regime with a broad campaign, he said.
Timing
The time frame for the renewal of the sanctions will be important to market participants.
A hard exit with a swift sanctions snapback would force customers to cut purchases almost immediately, while a more gradual reinstatement of U.S. extraterritorial sanctions would likely provide a grace period that allows foreign refiners to slowly reduce Iranian imports, wrote analysts led by Helima Croft, global head of commodity strategy, at RBC Capital Markets.
“While the U.S. would be going it alone this time around in re-imposing sanctions, we believe that the punitive U.S. measures would curb the enthusiasm of European energy companies to invest in Iran and would likely cause European and Asian refineries (ex-China) to reduce their purchases by around [200,000 to 300,000 barrels a day],” they wrote. “A hard exit would make these losses a Q4 2018 event, while a soft exit would push those reductions into H1 2019.”
The latter option might appeal to Trump, whose tweeted criticism of the Organization of the Petroleum Exporting Countries, or OPEC, last month indicated nervousness over the political fallout from rising gasoline prices, Croft said.
Financial sanctions
Another issue is whether the reinstatement of financial sanctions would apply to European banks, including those located in the U.K.
“The latter would be particularly important for freight reinsurance, lack of access to which proved a major hindrance to crude exports the last time sanctions were enacted,” they said, in a Tuesday note. Freight insurance refers to mutual associations that offer protection to oil and gas shippers.
‘Stay of execution’
Illustrating the stark outcomes, a “stay of execution” was the second most likely scenario, with a 30% chance, according to Kupchan.
That decision would indicate Trump wasn’t prepared for “the European, Iranian or market reaction that would begin the day after,” he said. It is also possible that Secretary of State Mike Pompeo might persuade Trump to give him a shot at tackling the Iran situation without immediately breaking the deal, he said.
No exit, but new sanctions
A scenario in which the Trump administration remained in the deal but imposed new sanctions under a different pretext, such as Iran’s support of the Syrian regime led by Bashar al-Assad, was an outside possibility, Eurasia Group had said.
In that situation, administration lawyers would likely argue that reimposing the sanctions for a different reason was allowed under the JCPOA, Kupchan wrote, but warned the assertion “likely wouldn’t pass the smell test in Europe and Iran,” leading them to declare the U.S. in breach of its commitments and effectively ending the deal.
The reaction
The reaction by U.S. allies, Iran and others will also be crucial.
For Iran, renewed sanctions would make it difficult for Tehran to justify maintaining its role in the agreement by OPEC and other major producers to maintain production curbs, the JBC analysts said.
“Iranian officials have stated that they would prioritize overall economic development over stabilizing crude prices, and we could see a discount on Iranian grades going forward to spark new export opportunities,” they said.
The European Union, meanwhile, might implement its blocking statute, which prohibits companies from complying with U.S. secondary sanctions, Kupchan wrote.
The statue also bans enforcement of related judgments by U.S. courts. Regardless of whether the statutes are enacted, the Europeans—led by France, the U.K., and Germany—”will shoot back at the U.S. if Trump implements sanctions on EU firms.”
Source : MTV
