Late Monday afternoon, President “Stable Genius” and his “very good brain” tweet-teased the Iran nuclear deal decision:
I will be announcing my decision on the Iran Deal tomorrow from the White House at 2:00pm.
— Donald J. Trump (@realDonaldTrump) May 7, 2018
“The ratings will be tremendous.”
This is one of the big geopolitical overhangs for markets right now and pretty much everyone on God’s green earth has implored Trump not to throw caution to the wind by abandoning this deal.
But if there’s anything Trump cares about almost as much as himself, it’s undoing anything and everything Obama accomplished, without regard for the consequences. That’s evident in virtually everything Trump does, but the overriding desire to wipeout Obama’s legacy is most clearly exemplified in the quixotic tilt at the ACA windmill and the incessant threats to pull the U.S. out of the Iran deal which, Trump says, is the worst deal in history with the possible exception of any other deal the country has ever entered into prior to his presidency.
Obviously the risks to crude were to the upside ahead of Trump’s announcement. Late last month, Emmanuel Macron and Angela Merkel reluctantly paid a visit to Washington in an effort to try and talk some sense into the administration, but all they got for their trouble were accusations of bad dandruff and an embarrassing press conference, respectively.
“It now seems more likely that the US will pull out of the agreement following the appointment of Iran hawks Pompeo and Bolton,” Barclays reminds you, adding that “the resumption of US sanctions could take 200-600kb/d of crude out of the market, but its effect depends on the definition of what products are under sanction, enforcement mechanisms, the implementation date, and Iran’s crude storage and blending decisions.”
Don’t expect the market to care about the details in the very near-term. Geopolitics have trumped (get it?) the rising dollar when it comes to crude and that seems likely to continue at least until there’s more clarity on what the relationship between Washington and Tehran is likely to be after this week. On Monday, WTI broke through $70 for the first time since 2014:
In what’s either an example of the market’s penchant for buying the rumor and then selling the news or else an example of rampant confusion, oil careened lower on Monday afternoon following Trump’s tweets and also amid a series of headlines from Barak Ravid of Israel’s Channel 10 who, in his own tweets, said French, British, and German diplomats were nearing an agreement with U.S. negotiators on a possible deal designed to convince Trump not to withdraw:
As a reminder, Rouhani said the following live on Iranian state TV on Sunday:
If America leaves the nuclear deal, this will entail historic regret for it.
Over the weekend, the Observer reported that Trump “hired an Israeli private intelligence agency to orchestrate a ‘dirty ops’ campaign against key individuals from the Obama administration who helped negotiate with Iran.” That news comes days after Netanyahu’s “Iran lied big time” presentation appeared to give Trump the pretext he needs. In an Op-Ed for The New York Times, U.K. Foreign Secretary Boris Johnson called a possible decision to abandon the deal “a mistake”.
So that’s the backdrop for Tuesday’s big announcement and on Monday evening, Barclays was out with an exhaustive note detailing what Trump’s options are and what the likely ramifications are for oil and FX under various scenarios. Because irony is dead and buried in the post-Trump world, the lead analyst on the note is the bank’s Michael Cohen (not that Michael Cohen).
First of all, here’s a timeline of the deal:
Barclays reminds you of how profoundly unrealistic this whole effort is on Trump’s part both in terms of how nebulous his demands are and also considering that there’s really no plan in place as far as how to go about negotiating a “better” deal. To wit:
The Trump administration has argued that the deal fails to address the full spectrum of threats from the Iranian government. In January 2018, Trump outlined his Iran strategy, further criticized the deal, and threatened to withdraw unless the Congress and allies “fix the terrible flaws.” He said, “This is a last chance,” and specifically demanded:
- The indefinite extension of uranium enrichment caps, which mostly expire by 2025-30, commonly known as sunset clauses.
- Authority for international inspectors to have “anytime, anywhere” inspections. Currently, only declared sites are permitted and can be inspected immediately. For other, non-declared sites, Iran has to object to the validity of the demand, or grant access within 24 hours.
- Inseparability between long-range missile and nuclear weapons programs. Incorporate “severe sanctions” against Iran for developing and testing long-range ballistic missiles.
- More stringent verification provisions and countering Iranian influence in the region.
Though European allies are encouraging Trump to remain part of the JCPOA, in our view, the administration is likely to attempt to unravel this framework in the pursuit of finding a better one, however improbable or unachievable that may be. The administration’s decision to leave the JCPOA falls in the same policy mold as leaving the TPP, the Paris climate accord, and UNESCO and renegotiating NAFTA.
A couple of things there. The demands on Iran’s missile program will never be met by Tehran. Trump can forget that. Also, do note that Barclays tacitly acknowledges that the administration appears to be attempting to simply exit any and all multilateral arrangements irrespective of whether there’s a compelling rationale to do so. The bank of course doesn’t put it that way and to be sure, there are flaws in some of these deals (most notably, TPP), but the overarching point is that this is a haphazard, bull-in-a-China-shop approach (literally in the case of the recent trade negotiations with Beijing) and now it’s being applied to an arrangement involving nuclear weapons.
Next, Barclays outlines three issues before listing Trump’s two options. Here are the issues, truncated:
First, the JCPOA is not an international treaty, given it has never been ratified by Congress; President Trump can effectively withdraw from the deal.
Second, a unilateral withdrawal from the JCPOA does not require the Trump administration to provide proof of Iranian non-compliance.
Third, if the Trump Administration does not certify compliance under the 90-day requirement, it does not automatically cause sanctions to be re-imposed, as has already happened on 13 October 2017, 13 January 2018, and 13 April 2018. In fact, a decision on certification is separate from the presidential decision on whether to re-impose sanctions.
And here are what Barclays dubs the “two main categories of options”:
Non-extension of sanctions waivers via Trump’s executive orders. Most important, section 1245 of the NDAA requires countries significantly to reduce their Iranian oil imports to qualify for a waiver from US secondary sanctions.
INARA provisions. Under INARA, the administration can stop implementation of the JCPOA but must provide Congress with evidence of an Iranian breach. Such a breach report to Congress would certainly raise some eyebrows among the P5+1. We would expect other countries to ask for IAEA evidence to corroborate the US findings.
As far as the market fallout is concerned, we’re going to save our breath until we find out what the actual decision is on Tuesday.
But what we would reiterate (and Barclays flags the same risks) is that if Trump takes an adversarial approach here, he will surely inflame tensions in the region at a time when Israel has become increasingly aggressive towards the Iranian presence in Syria and just as the administration’s “friends” in Riyadh have been especially keen on trying to curtail Tehran’s growing regional influence. In fact, on Monday, the Saudis said they targeted senior Houthi leaders in Sana’a as the Sunni coalition continues its efforts to ensure that the Shiite crescent isn’t complemented by a flanking presence in Yemen.
“An escalation of incidents between Iran and Israel in Syria has been palpable this year, and Netanyahu’s alleged evidence of a covert Iranian nuclear program in 2003 adds risks of further escalation,” Barclays concludes, adding that “traditionally, tensions with Iran have translated into broader regional tensions [and] the former could complicate the Yemeni and Syrian conflicts and increase tensions with Gulf countries.”
Oh, one last thing. This comes as Hezbollah has continued to benefit from the regional turmoil, with the latest indication being the early results from elections in Lebanon. On that note, we’ll leave you with the following from The New York Times:
Hezbollah and its political allies expanded their share of seats in Lebanon’s Parliament, increasing their political clout at the expense of the country’s Western-backed prime minister, according to preliminary election results released on Monday.
The outcome of Lebanon’s first parliamentary elections in nine years shored up Hezbollah’s position in a way that is likely to alarm the United States, Israel and Gulf Arab nations like Saudi Arabia.
While the number of seats held by Hezbollah itself remained largely unchanged at around 13, victories by political allies who support its maintenance of a vast arsenal increased the chances the group would play a key role in a coalition government and diminished the prospects for legislation that would challenge its status.
The election’s biggest blow was to the movement lead by Prime Minister Saad Hariri, the country’s most prominent Sunni Muslim politician and an ally of the West.
His group, the Future Movement, saw its parliamentary share shrink by about one-third, to 21 seats from 33 seats, in the 128-member body, Mr. Hariri told reporters on Monday.