(Bloomberg) -- Oil markets have so far reacted to President Donald Trump’s decision to withdraw from the 2015 Iran nuclear deal without either enthusiasm or panic — without even much apparent interest. There are many good reasons for this, but also many reasons to think oil markets’ complacency could change. Fortunately, the Obama-era sanctions that Trump has moved to reimpose have some lesser-known safety valves should oil markets later overheat as a result of the Iran decision.
After some gyrations in anticipation of Trump’s announcement on Tuesday, Bloomberg’s spot market price for oil finished the day just two cents above where it began. This seeming indifference is in itself interesting, when the U.S. has just announced that it will levy the toughest sanctions on one of the world’s largest oil producers.
It could reflect the fact that markets had already priced in Trump’s decision — the direction, if not the intensity, of which surprised few. But it also suggests that the market sees November — when sanctions on those importing Iranian oil will come into effect — as far away. Moreover, there is sufficient spare capacity in the system to fill in any gaps that may arise, and Saudi Arabia has already declared its willingness to tap into its own capacity to smooth markets if needed. Indeed, these sanctions could provide OPEC and its non-OPEC partners a graceful exit to their ongoing agreement to cut production, without jolting the market.
Perhaps the most interesting reason for the relative calm since Trump’s announcement may be that the market has finally grown confident about U.S. oil production from shale, and the likelihood that higher global oil prices will prompt greater domestic production relatively quickly.
However, at least three things could end the market’s complacency in the coming months.
First, while oil markets may have already priced in a U.S. withdrawal from the Iran deal, they seem unlikely to have done the same for a further decline in oil exports from Venezuela. The results of the Venezuelan presidential election now scheduled for May 20 — despite U.S. and EU calls for its postponement — are predictable. But if the election itself is seen as corrupt, the U.S. and possibly others could increase sanctions on Caracas, affecting the supply of oil flowing from Venezuela. Even if current levels of spare capacity are sufficient to address any Iran disruption, covering simultaneous disruptions from Iran and Venezuela could prove much more difficult.
In addition, it may soon become apparent that the U.S. and Saudi Arabia do not exactly agree on what is needed to maintain oil market stability. Saudi Arabia’s interest in seeing the global oil price increase further — to $80 a barrel or beyond — may make Riyadh slow in reacting to any Iranian (or Venezuelan) supply disruptions.
Finally, the risks to oil markets from Trump’s decision are not simply in removing Iranian exports from the market. Regardless of whether Iran reacts by ramping up its nuclear program, Riyadh will be sure to increase pressure on the U.S. and its partners in the region. Expect tensions to mount further in Iraq, Lebanon, Syria and Yemen — and with them, more geopolitical jitters not directly related to Iran’s export ledger.
Tuesday’s move is more evidence that Trump has an outsize assessment of his negotiating capabilities and holds an unrealistic set of assumptions about how Iran and other countries will react to greater pressure. Trump’s big gamble — that turning up the heat on Iran will force Tehran back to the negotiating table before oil sanctions are to be imposed in November — is likely to fail. And if it does, and any of the above risks also materialize, Trump may be looking for a way to mitigate pressure on the oil price to move higher. (After all, not only would oil prices significantly higher than today’s be bad for the U.S. consumer, they would also be good for Iran.) If so, there are a couple of mechanisms in the sanctions legislation that could provide some relief on the oil price front.
Despite Trump’s strong words, there are at least a couple of scenarios in which the administration could still decide not to impose sanctions on Iranian oil exports at the end of the “wind down” period. (It will, however, still impose a wide range of other sanctions.) First, the legislation on oil exports allows the administration to offer exemptions to entities that are based in countries that have “significantly reduced” their import of Iranian oil. What exactly qualifies as “significant” is undefined. The Obama administration decided that “significant” meant a 20 percent reduction in imports every 180 days; its officials traveled extensively, putting pressure on dozens of countries to reduce their consumption of Iran oil and therefore qualify for an exception, as China, India and others ultimately did.
Even if the Trump administration were inclined to make such an effort, the cards are stacked against success. First, the administration is unlikely to have the resources for such a sustained, full-court diplomatic press, given the recent gutting of the State Department. Moreover, its envoys would find cold welcome when they arrived. When Obama officials paid their visits, they met with counterparts who were sympathetic to the idea that Iran’s nuclear program posed an urgent threat to the international system. After Tuesday’s performance, at least in some locations, officials will tend to view the U.S. administration itself a destabilizing force. In this situation, the Trump administration may define down “significant,” allowing the U.S. to issue waivers to countries and their companies that have done far less than was required under President Barack Obama to curb their imports of Iranian crude.
The second possible move is to take advantage of a provision in the relevant piece of legislation of which Obama never availed himself. It allows the administration to make a determination that global oil markets are too tight for sanctions to be imposed without running a serious risk of an oil price spike detrimental to the economy. Trump, or his designee, could make this assessment and decide against imposing sanctions on entities doing business with the Central Bank of Iran (as they must to import Iranian oil) even in the absence of many deciding to scale back Iranian imports.
Both of these options would have the effect of easing the pressure on Iran and, if needed, on the global oil price. But they give Trump more flexibility than he appears to have given himself with his tough talk against Iran on Tuesday. Neither provision would repair much of the damage done to U.S. credibility, to U.S.-European relations, or to the agreement that was at least buying the international community some time in dealing with Iran. Yet by November, if oil prices are creeping up and U.S. voters are feeling the pain, the administration may be looking for any and all possibilities to mitigate the consequences of its decision on the Iran deal.
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