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This Oil Major Just Circumvented Sanctions On Iran

Iran is now officially pre-qualifying…

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U.S. Crude Oil Output Drops In September

U.S. crude oil production dropped…

What Happens To Oil If Trump Tears Up Iran Nuclear Deal

Trump U.S.

U.S. President-elect Donald Trump has vowed to rip up the Iranian nuclear agreement on Day 1, and reimpose sanctions on Iran. The move could potentially have far-reaching consequences for the oil markets.

The 2015 deal between the P5+1 nations (U.S., France, the UK, Russia, China and Germany) and Iran was one of the signature achievements of the Obama administration, one that produced multiple benefits. First, it ratcheted down tensions between Iran and the U.S., a relationship that had become so hostile in the preceding years that the drumbeats of war were audible in Washington. Second, the agreement put restraints on Iran’s nuclear program. From Iran’s perspective, the deal also paved the way for a return to international markets, and allowed them to ramp up oil production and exports. All told, Iranian oil exports had dropped from 2.4 million barrels per day (mb/d) in 2011 to just 1 mb/d by 2013. Iran has since restored much of that lost output.

However, the historic thaw in relations became a lot more complicated with the election of Donald Trump, who has vowed to take a hardline with Tehran. It is not clear that the mercurial President-elect will follow through on his threat (or a long list of other campaign promises), or back off once he sits in the Oval Office and takes a harder look at the agreement.

If he does follow through on killing the accord, the fallout could be significant. It is unclear how effective it will be to unilaterally re-impose sanctions on Iran. Considering the size of the U.S. economy, threatening to close off access to the American market to anyone purchasing Iranian oil could be persuasive. That could potentially cut off some Iranian oil exports once again, which would have the effect of taking global supplies off the market, thus pushing up prices.

Related: Is Iraq Coming Back To The OPEC Deal?

On the other hand, as a new report from Columbia University’s Center on Global Energy Policy details, the restoration of sanctions might have a more nuanced outcome. It would likely be met with dismay across the globe, including from U.S. allies that worked hard to reach an accord. Some countries, including American allies in Europe and Asia could reject the Trump administration’s demands. As such, oil flows would be rerouted from countries that comply with Washington’s demands and put sanctions back in place to countries that refuse to comply. If a large oil purchaser, such as China, decides not to cooperate with President Trump, the U.S. effort to contain Iran will likely fail.

The Columbia University report also offers some interesting theories on Iran’s calculus regarding cooperation with OPEC if the U.S. tears up the nuclear accord. On the one hand, Iran might decide to cooperate with OPEC in order to boost oil prices now, thus making it more painful for the international community to restore sanctions because it would have the effect of further pushing up oil prices. The flip side is that Iran might try to produce as much as possible today for fear of seeing output curtailed by international sanctions in the future.

For oil prices, the effect of a more confrontational approach would be bullish, to say the least. The potential for supply outages would rise. But the geopolitical risk premium would arguably be more important. Tearing up the nuclear accord would leave moderate Iranian officials in the lurch, many of whom took a great deal of risk to support negotiations with the U.S. Hardliners would thus be strengthened, and conflict between Washington and Tehran would be hard to undo.

Of course, for many in the Trump administration, there is plenty of upside from this. Donald Trump has tried to curry domestic political support by taking an aggressive position towards Iran. Meanwhile, several rumored appointments in the Trump administration have a long history of advocating for a hostile approach towards Iran.

Related: U.S. LNG Is Changing The Global Gas Game

Congressman Mike Pompeo has been appointed to lead the CIA promised to “roll back” the nuclear deal as recently as last week. The hawkish National Security Advisor Retired Army Lt. General Michael Flynn is also a critic of the deal. Most important of all is probably the potential selection of John Bolton to lead the State Department. Bolton is one of the most extreme critics of the Iranian nuclear deal and Iran in general, and he openly called for regime change in Tehran just a few days ago. Should he be selected to lead the State Department, Trump will likely have telegraphed his intentions to scrap the landmark deal.

Then there are the top executives from the oil industry that have the President-elect’s ear. They would stand to benefit from the spike in oil prices if Iranian oil was forced out of the market. The Columbia University report estimates that U.S. shale would see an increase in output of 300,000 to 900,000 barrels per day in the next few years if oil prices rise to $60 per barrel. It is not hard to imagine oil prices rising that high if the U.S. openly tries to isolate OPEC’s third largest producer.

Of course, when dealing with Donald Trump, it is impossible to make accurate predictions. We may have to wait until January to find out what he will do.

By Nick Cunningham of Oilprice.com

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  • Gunzo on November 23 2016 said:
    Trump is a reckless guy. He probably would do what he said he would do. But this time the international community cannot be taken for granted. Trump will be questioned and would be left alone. American supremacy will be exposed. Oil prices through the roof.
  • Bill Simpson on November 23 2016 said:
    Suppose ripping up the deal empowers the hard liners in Tehran, and they say they are pulling out of the deal, and restarting uranium enrichment? You bomb Iran, and 10,000 rockets will be fired from Lebanon into Israeli cities. The Iranians might unleash their SCUDS into cities and petroleum complexes throughout the Middle East. They could float thousands of mines into the Persian Gulf, and unleash terrorists attacks on US businessmen worldwide. Think that will be good for the economy? How about gasoline at $7 a gallon, and rationed?
    Suppose Putin decides to start shipping sophisticated missiles to Iran, telling them they can pay him whenever they get the money. People should remember that Russia can exist without a drop of imported oil or gas. He would enjoy watching the US get involved in a very expensive war in the Middle East, and for US drivers to have to wait for expensive, rationed gasoline. The more damage in the Middle East, the more valuable Putin's oil becomes. Trump's son in law might want to tell him that his fellow Jews in Israel probably wouldn't enjoy SCUDS raining down on those fancy skyscrapers in Tel Aviv. Don't poke a hornet's nest. Let sleeping dogs lie.
  • Jonas on November 24 2016 said:
    What deal? Is there a sign deal?!
  • Jim Decker on November 24 2016 said:
    Suppose... Suppose.... Suppose

    Suppose we take out their enrichment because they already violated the phony treaty. Suppose we take out their navy the next time they give us an excuse- that would take about one day and there would be no mines. Suppose we took out their missiles and aircraft with drones- that would be day 2. Suppose Israel invades Lebanon like they have before to stop terrorists.

    Suppose after we did all this, Russia and China did nothing- because they wouldn't dare. Two days to undo the mess that Clinton and Obummer made. Not bad.
  • Stephen on November 26 2016 said:
    Boeing, seattle and the US can kiss the order for new planes goodbye. Airbus and non US firms win over the US. Its likely that the EU, India and China will ignore what Trump does. We know hardliners in Iran will win. While the Saudi's are no fan, they don't want an unhappy Iran either. Oil prices rise in the US unless exports are banned again, Russia gets richer and can flex their power ambitions. Banking does take a tumble with US bans back in place. Iran then loosens their control over Hamas and its Syrian militias and the US pay the price in an extended war with nothing to win bar Isis losing ground and Al queda back in the mix. Pity Trump thinks short term and backs the same idiots that Bush did.
  • Heather on November 27 2016 said:
    The Iran deal ratcheted down tensions between USA and Iran........ when exactly did this happen? Seems to me it only emboldened Iran to be more aggressive. I have not seen any ratcheting down!

    I guess we know who the author of this article voted for! He thinks there is a reduction in aggression from Iran!
  • zipsprite on November 27 2016 said:
    @ Jim Decker

    And on day 3 of this scenario, what do you SUPPOSE the price of oil would be? Hint: If you could get it for $100 dollars/B you would have scored big.

    The idea that we can, by military force, impose our will on the world is naive. The unintended consequences of what you propose would crash the world economy over night. It was a heavy lift getting the sanctions and then the Iran deal agreed among the six parties. Whether you think it was a good deal or not, if we tear it up they have every reason to sabotage anything we put forward in world politics. If you think China has been a little unruly lately, everything up to now would be as nothing compared to what would follow. For starters, China would gladly buy all the oil Iran wants to sell. Sanctions from the US would be meaningless. Or are you proposing that we also bomb the legal trade of oil between Iran and China (legal since there would be no sanctions, just the US impotently shouting "don't buy Iran's oil")? Putin would be like a kid on Christmas morning because we would have isolated and weakened ourselves by our own actions.

    Economically you are talking about a crash unrivaled in human history. Militarily you are talking a very real possibility of WW3. Either way (or both), it would not end well. There would be NO victors.
  • Stackman67 on November 28 2016 said:
    Who wrote this!? Obviously an Obama propagandist. Totally one sided and under the premise that Iran has abided at all to the "Deal" in question. The "Deal" is a complete sham that only strengthens the largest sponsor of terrorism in the world. They continue to call for the complete destruction of Israel and death to America. Obama paid millions in ransom to this terrorist led country, lied about, and then said aw shucks, ok we did. The media went silent after that and he got the proverbial pass that the media has given him on every embarrassment and failure of his terms. Iran should be treated like the pariah they are until they show some semblance of reform and actually "give" as well as take in these deals. Obama and his apologists live in a fantasy world that if your nice to the bully he'll be your friend. That might work on the playground, and if not you just wind up with a black eye. When dealing with "Islamic Extremists" it could very well end up with nuclear fire.
  • Cowpoke on November 28 2016 said:
    Obama was "Reckless" in pursuing this "deal" in the first place.

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