At the risk of trivializing something that has clear geopolitical ramifications and does, in fact, have the potential to squeeze an already tight market, it’s not entirely clear whether the Trump administration’s decision not to renew waivers on crude purchases from Iran is as big of a story as it’s been made out to be over the past 48 hours.
The fact is, there was a demonstrable dearth of news coming off the holiday weekend and with many markets still closed on Monday (and more holidays on deck), the Iran waivers story “won” by default when it comes to coverage.
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Don’t forget that the decision to allow the waivers in the first place was a surprise, considering how hard the administration had pushed the envelope last year. So, characterizing the decision not to renew the exemptions as something that came out of left field seems a bit odd.
Additionally, it’s hardly news that John Bolton and Mike Pompeo are keen to turn the screws on Tehran – perpetuating the “tough on Iran” strategy is a veritable obsession for both men.
Further, the White House pretty clearly believes the belabored effort to shield Prince Mohammed from the Khashoggi fallout (in addition to taking the unusual step of effectively denying the CIA’s assessment of Riyadh’s culpability in the extrajudicial killing of a journalist, Trump stonewalled a Magnitsky Act request and exercised the second veto of his presidency to override a congressional resolution aimed at ending US support for the Saudi-led campaign in Yemen) means the Saudis owe Trump a solid, which in this case means ensuring lost Iranian barrels are replaced. The assumption that the Saudis are willing and able to step up may be misplaced, but that’s obviously the expectation.
On the other hand, making snap decisions without consulting anyone or otherwise evaluating the potential ramifications is a point of pride for Trump and importers were apparently caught at least a little bit wrong-footed. “Importers had been expecting the waivers to be extended, perhaps with a cut in permitted volumes instead of an outright ban”, Bloomberg notes, citing refinery officials in Asia and adding that according to a person familiar with Trump’s plans, “some of the countries that had previously received waivers would be given a little more time to wind down purchases.” Any such leniency will be pitched as a “grace period” rather than a waiver extension, that person said.
Obviously, the move presents an upside risk to prices, at least in the near term. It’s possible that an already furious IRGC will curtail movement through the Strait of Hormuz. “If we are prevented from using it, we will close it”, Fars said Monday, citing the head of the Guard’s navy. “In the event of any threats, we will not have the slightest hesitation to protect and defend Iran’s waterway.”
For their part, Barclays expressed a bit of incredulity at the move on Monday, but the bank notes that its longer-term forecasts for oil are largely unaffected. “Most market participants, including us, were expecting the 180-day significant reduction exemptions… to be rolled over at a reduced level”, the bank wrote, before noting that Monday’s announcement “implies material upside risk to our current $70/b average price forecast for Brent this year, compared with the year-to-date average of $65/b.”
After reiterating that their longer-term outlook isn’t affected, Barclays cautions that in their view, “Saudi Arabia’s response will likely be lower and slower compared to late last year.”
“While Saudi Arabia, UAE and other OPEC countries will likely fill the gap… it will come at the cost of a significant reduction in the spare capacity and also increase the risks of a potential conflict in the Middle East”, the bank warns, adding that “how China and India respond will also be key.”
India sought to allay concerns on Monday, while China expressed its disappointment at the US decision.
(Barclays)
For their part, Goldman agrees that this was a surprise. “While this decision is consistent with the US administration’s stated goal of stopping exports, the timing of this halt is much more sudden than we and consensus had assumed”, the bank’s Damien Courvalin wrote late Monday.
That said, Goldman calls this week’s rally in crude “modest” compared to the potential of 1.3 million b/d of lost supply.
(Goldman)
The bank attributes that to a “drastically different” fundamental backdrop, characterized by better visibility into spare capacity from key suppliers, and those suppliers’ stated intent to keep the global market balanced. The bank also mentions “looming de-bottlenecking of the Permian.” Courvalin adds the following color on Monday’s action:
The nature of today’s move is illustrative of this stark difference in market conditions, driven by a sharp steepening in backwardation and not a rally in long-dated prices. Instead of a fear of lack of spare capacity like last year, today’s curve move can instead be viewed as a downward assessment of inventories on an expected lagged response by core-OPEC to avoid last year’s too aggressive and pre-emptive ramp-up.
Ultimately, Goldman is in the same camp as Barclays when it comes to acknowledging upside risk to prices in the near-term. But Courvalin generally avoids any kind of dramatic pronouncements about a longer-term impact. Goldman’s fundamentals-based forecast for Brent in Q2 remains a range of $70-75/bbl.
Of course what’s difficult to account for is the possibility that Trump, Pompeo and Bolton push things too far, risking open conflict with Iran or, at the very least, exacerbating instability in Iraq and hardening the resolve of Tehran’s Shia proxy forces across the region.
The goal of forcing the Iranians to the table to renegotiate the nuclear deal seems far-fetched, especially given the fact that virtually none of America’s allies and/or pseudo-allies supported Trump’s decision to pull America out of the accord in the first place.
This is all about the intersection of Neocon Policy, American Politics , Macro Economic Policy (the zero sum game) and the Opportunity to Control the Worlds resources which (as the stars are currently aligned) may never be able to happen again…So all the stops are being pulled out while the opportunity exists……think Trump…!!!
The arrogance of this administration with regard to Iran is breathtaking. Sure, they have the right to withdraw from the agreement, but their actions in attempting to threaten the other signatories and independent nations with sanctions if they don’t comply with America’s decision is an attempt to dictate the foreign policies of its’ allies and other nations.