Yeah so on Monday evening we brought you a pretty comprehensive take on what’s at stake Tuesday with Trump’s Iran announcement. We highlighted some commentary from Barclays and went (back) over the apparent “sell the news” dynamic that unfolded Monday afternoon when oil careened lower following Trump’s tweet and also amid a series of headlines from Barak Ravid of Israel’s Channel 10 who, in his own series of 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.
Fast forward to Tuesday morning and crude plunged anew breaking below $68 just a day after breaching $70 for the first time since 2014. The apparent catalyst was an article from CNN, the gist of which is this:
President Donald Trump is expected to announce on Tuesday he will allow sanctions to go forward on Iran, a first step toward withdrawing from the touchstone nuclear agreement negotiated by his predecessor, according to a US official and a person familiar with the plan.
However, the sanctions could take months to go into effect as the US government develops guidance for companies and banks. The officials cautioned nothing is final until Trump makes his announcement from the Diplomatic Room of the White House at 2 p.m. ET, and held out the possibility that he could change course.
The sanctions Trump is expected to allow to move forward target Iran’s oil exports. For now he’s not expected to impose additional sanctions.
The decision would strike a blow to the nuclear deal, but it’s not clear it would cause the entire agreement to collapse. The other signatories to the plan, including Germany, France and the UK, have said they will maintain their commitments.
Those bolded bits are probably contributing to the readily apparent “sell the news” mood that had WTI down more than 4% at one point:
And then, on the heels of CNN’s report, The New York Times was out with this:
President Trump told President Emmanuel Macron of France on Tuesday morning that he plans to announce the withdrawal of the United States from the Iran nuclear deal, according to a person briefed on the conversation.
Mr. Trump’s decision unravels the signature foreign policy achievement of his predecessor, Barack Obama, isolating the United States among its allies and leaving it at even greater odds with its adversaries in dealing with the Iranians.
The United States is preparing to reinstate all sanctions it had waived as part of the nuclear accord — and impose additional economic penalties as well, the person said.
A second person familiar with negotiations to keep the 2015 accord in place said the talks collapsed over Mr. Trump’s insistence that sharp limits be kept on Iran’s nuclear fuel production after 2030. The deal currently lifts those limits.
So there’s some conflicting information in there (specifically the bit about “additional” sanctions). We’ll see how things pan out. It’s playing havoc with crude:
Analysts are split on this whole thing. “Trump will likely announce he will no longer waive sanctions against Iran, but is skeptical Iran will resume full-scale nuclear enrichment,” Beacon Policy Advisors writes, adding that “if Iran demonstrates restraint, [it’s unlikely] other countries will re-impose sanctions.”
“[He might] seek some nuanced middle ground instead of either full/ immediate exit, or a continuation of U.S. commitment contingent upon a new deal,” Height Capital Markets Clayton Allen chimed in, before suggesting that Trump “may attempt to thread the needle” by coming across as “tough by re-imposing only limited sanctions, while not going so far as to push EU, other partners away” in the process buying time “for future negotiations [and] increase U.S. leverage with EU.”
Here’s a bit of additional color from the Barclays piece which looks like it’s going to be the go-to resource until everyone else puts out their own comprehensive assessments:
If the sanctions waivers are not renewed, Iran is likely to have difficulty marketing its oil, but this difficulty would not be permanent, in our view. In 2012-13, Iran opened up accounts in local currencies in buying countries that it then used to finance imports. If China, India, Japan, and South Korea do not impose sanctions on the Central Bank of Iran, these countries would be unlikely to stop taking Iranian oil and could serve as an offset to European buyers that would wait to see how the sanctions regime looks.
If the waiver is granted in May and investors await the next decision in July, we do not think that this would be as price supportive or disruptive to Iranian export flows in the short term and could precipitate a sell-off in oil. That decision would effectively delay until July the consideration of the sanctions waivers and certifications that are on a 180-day cycle, including a waiver not to sanction firms for underwriting the National Iranian Oil Company (NIOC) and the National Iranian Tanker Company (NITC).
In our view, these price moves are unlikely to be sustainable for fundamental reasons and because we believe the market will be trying to price a worst-case outcome absent any real clarity about what the new policy will mean for short- and medium-term Iranian oil supply and export eventualities. Production is already estimated in April at almost 500 kb/d higher than the Q1 average.
We believe Iran will find itself with more flexibility for a couple reasons:
- The process of enforcement and clarification could vary widely in degree and take months to implement. During that time, US policy might change again or negotiations over a new agreement could involve new sanctions waivers. To reduce the effect on oil markets, the NDAA allows an incremental reduction during a 180-day period (including 90 days for the US Energy Information Administration to determine whether global oil supply is adequate). The administration could cite the risks to oil market stability and waive the sanctions implementation or be more lenient with the enforcement of “significantly reduce” than the US was in 2012-13, using a 10% reduction, rather than 20%.
- Since the EU and other Iranian oil customers are unlikely to remain in sync with US sanctions imposition, most European counterparties are likely to avoid buying Iranian oil in the short term, causing a temporary fluctuation in exports and re-export elsewhere without any real noticeable change to wellhead supply.
- If the short-term physical effect on Iranian output is minimal, it is far more justified to see 2-5 years deferred oil prices move up as a result of this decision than prompt prices because of the legitimate long-term effect on Iran’s supply.
Whatever the case, oil looks like it’s going to be whipsawed in the near-term as “sell the news” competes with “well, he did it” for the hearts and minds of traders.