What Trump’s decision on Iran nuclear deal means for oil prices

Source: By Steven Mufson, Washington Post • Posted: Tuesday, May 8, 2018

President Trump has until May 12 to choose whether to scrap the Iran nuclear deal and reimpose sanctions, but the uncertainty over his decision is already roiling the Iranian economy and international oil markets.

Since December, Iran’s currency has lost one-third of its value. Foreign investors, who have been jittery ever since Trump took office, have delivered only a fraction of their commitments. And while the Iranian economy has generated 600,000 jobs a year since the nuclear deal took effect in 2016, unemployment isrunning at an all-time high.

“There is a sense of panic among Iranians about what the future holds. Trump has absolutely exacerbated a sense of financial insecurity,” said Suzanne Maloney, senior fellow at the Brookings Institution.

The rising price of uncertainty has rippled through international crude oil markets as well. The price of West Texas Intermediate crude topped $70 a barrel Monday for the first time since 2014 amid fears that renewed U.S. sanctions would require international companies to buy less Iranian oil or face stiff penalties.

Oil experts estimate that renewed sanctions could take about 350,000 to 500,000 barrels a day of Iranian crude off world markets within months, a modest but meaningful amount. And more could be at risk later, potentially adding $7 a barrel to world prices, a Goldman Sachs report to investors said. Iran exports about 2.6 million barrels a day.

Big projects could be threatened too, especially in the oil and gas sectors that suffered from under-investment during the sanctions years. The French oil giant Total last July signed a 20-year deal with the National Iranian Oil Co., starting with a $2 billion project that would include 30 wells, two platforms and two subsea pipelines to boost natural gas production in Iran’s South Pars field. The Chinese National Petroleum Corp. is a 30 percent partners.

But Total, whose chief executive was one of 15 European CEOs to dine with Trump on Jan. 25 during the Davos conference, has interests in the United States as well and would not want to violate U.S. law.

Under the terms of the Joint Comprehensive Plan for Action reached July 2015, Iran agreed to intrusive inspections and limitations on its nuclear program. In return the United States and its five major partners — Russia, China, France, Britain and Germany — agreed to remove restrictions on Iranian oil sales, lift certain financial limitations and clear the way for investments by foreign countries. Iranians celebrated noisily in the streets of Tehran after the deal was signed.

Iran’s oil sales jumped. Its exports of non-agricultural products doubled and its imports of non-agricultural products soared 12-fold.

For the United States, the deal meant that the White House would waive restrictions allowing international firms to conduct business — including oil transations — through the Central Bank of Iran.

The current waiver expires May 12. If Trump does not issue a new one, his administration would start asking oil traders and companies around the world — including in European countries that support the nuclear deal — to cut purchases, according to Richard Nephew, a senior researcher at Columbia University’s Center on Global Energy Policy. Nephew was a key part of the U.S. team that negotiated the Iran deal.

Since new sanctions under Trump would include penalties against any company doing business in the United States, European refiners would likely comply. They account for about a quarter of Iranian exports. Refiners and traders in Asia, however, could end up getting bargains.

”I’ve talked to more than enough companies—they understand what the sanctions environment will look like and what will be asked of them by the U.S. government,” Nephew said. “And so they are already looking ahead to see whether or not they need to make reductions. And presumably those that don’t intend to comply, they’re licking their chops at what kind of discounted oil they may be able to get from Iran.”

Prior to reaching a deal with Iran, the Obama administration pressed oil companies into making “significant” cuts in purchases, usually about 20 percent, every 180 days. Iran’s oil sales were reduced by more than 1 million barrrels a day.

The flood of U.S. shale oil that began in 2009 easily offset the loss of Iranian exports. Saudi Arabia, Iran’s rival and leading critic of the nuclear deal, also pledged to make up any loss of Iranian production. Crude prices remained low.

Now, however, cuts in Iranian exports would have more effect. Political turmoil in Venezuela has lowered oil exports. Global oil demand is rising thanks to faster economic growth. Global inventories of petroleum are lower than they’ve been for nearly four years. And so far the Saudis, eager to drive inventories down further, have not offered to make up for Iranian crude taken off the market.

The reduction in Iranian oil exports would also hurt the Islamic Republic at home. Crude oil and petroleum products make up more than 60 percent of Iranian export revenues and a large proportion of the state budget.

Iran has some room to deal with a decision by Trump to undercut the deal. Djavad Salehi-Isfahani, professor of economics at Virginia Tech, said in an email that “it will take a while for sanctions to get as bad as they were in 2013, when Iran’s oil exports hit a low.” And he said that there is a United Nations process that would take two or three months to unfold, and that European leaders might challenge secondary sanctions on their companies.

Moreover, he added, even with a cut in oil exports to 1.5 million barrels a day, oil exports would generate about $40 billion a year in revenues. And Iran has built up cash reserves.

The biggest cost of a change in U.S. policy could be political. Trump could end up weakening the hand of the moderate President Hassan Rouhani, who supported the deal. Salehi-Isfahani wrote recently “if Rouhani ever held the key to the door of prosperity, as he was fond of saying in his 2013 presidential campaign, he failed to locate the keyhole in time.”