An agreement is an agreement, or so it’s said.
Tensions are skyrocketing after Israeli Prime Minister Netanyahu’s claim that Iran has violated the Joint Comprehensive Plan of Action (JCPOA) agreement.
This is the deal that was meant to shut down Iran’s nuclear weapons program.
Whether Netanyahu is correct or not, it puts the ball in President Trump’s court. Remember, he has questioned the JCPOA since before his election.
But while the talking heads on TV will tell you that cancelling the JCPOA and renewing sanctions on Iran will drive oil prices up…
The truth is much messier. Here’s what’ll really happen…
Iran’s Restrictions are Extensive – and Controversial
As we await a Trump decision on whether to continue the Iranian nuclear accord, the uncertainty is beginning to have an impact on oil’s pricing volatility.
The accord signed during the Obama administration is officially called the JCPOA. It was agreed upon in Vienna on July 14, 2015 after some 20 months of negotiations.
Signatories include the five permanent (and veto carrying) members of the UN Security Council (U.S., UK, France, China, Russia), Germany and the European Union (P5+1+EU) on the one hand, and Iran on the other.
Under JCPOA, Tehran agreed to eliminate its stockpile of medium-enriched uranium, reduce its store of low enriched uranium by 95 percent, and decrease the number of gas centrifuges for 13 years by some 67 percent.
Additionally, for a period of 15 years, JCPOPA states that Iran would do the following:
• Not enrich uranium beyond 3.67 percent, enough for energy use but well below weapons grade;
• agree to forego the building of any new heavy-water plants, essential to control nuclear reactions, over the same period, and
• limit enrichment to a single location employing first generation centrifuges for a period of 10 years.
In return, the P5+1+EU agreed to begin phasing out – subject to a sequence of verifications – economic and trading sanctions imposed by the U.N., the U.S., and the E.U.
However, during the 2016 presidential campaign Trump heavily criticized JCPOA and pledged to scrap the accord…
America Wants More from the Agreement
In President Trump’s view, matters not part of the agreement – such as Iranian support for global terrorism, continued development of ballistic missile programs, and support for enemies of Israel and Saudi Arabia in the Persian Gulf region – need to be added to the arrangement. Related: Expert Analysis: Is This The End Of The Iran Deal?
As a result, the White House announced in October of last year that it would not provide the periodic JCPOA certification as required under U.S. law.
However, the administration did not end the agreement.
This week, Israel released documents claiming that Iran has continued its nuclear program in violation of JCPOA. The presentation was less than compelling, including little tangible information about the post-accord environment.
Both the International Atomic Energy Agency (IAEA) and independent watchdog organizations have said that there is no evidence to support the contention that Iran is evading JCPOA. The IAEA has the responsibility under JCPOA to monitor Tehran’s compliance.
Now, my Iranian contacts were quick to note the obvious: Each of the new demands made by Washington are not part of what is covered by JCPOA.
“One does not revise an international arrangement after the fact to pander to one’s own internal politics,” a source in the Iranian National Oil Company said over the weekend.
There is also strong support from other permanent UN Security Council members, Germany, and the EU to continue the agreement.
Yet all other parties are very aware that JCPOA will not survive if the U.S. pulls out.
And neither will the current oil environment…
The Future without the JCPOA Is Bleak
The global pricing of crude oil is now feeling the impact of the politics swirling about Washington.
I expect that the current intent inside The Beltway is to develop evidence to support the Israeli claims. But there seems to be little leverage to accomplish such an objective, even if the administration can figure out what it wants to add.
This is an exceptionally dangerous play with no clearly identifiable upside beyond delivering on a campaign pledge and a few tweets.
Trump may have made a threat to scrap JCPOA a central theme for his political support base and has said that a better replacement is needed, but that development has a very low probability.
Throwing out JCPOA will certainly put Iran back into full weapons development with a corresponding rise in geopolitical uncertainty.
And there will be a direct impact on oil prices.
Renewal of U.S. sanctions will increase the cost of Iran’s crude exports, cut Tehran off from easy access to global banking and capital, and in all likelihood reduce the country’s predictable export volume.
These are factors that would contribute to an upward pressure on international global oil prices.
But there are other things to consider – factors that could be even stronger and ultimately drive prices in the other direction.
For one thing, Iran would certainly stop any pretense of abiding by the OPEC-Russia production cuts. That, in turn, would prompt defections by others.
Moreover, the enticement for a spike in production will be almost irresistible for U.S. companies – which are both the quickest sources of additional oil coming into the market, and the main source not subject to production caps.
But the main destabilizing factor emerges from the acceleration in volatility itself. Related: Russian Oil Turns Its Back On Its Biggest Customer
Any perception of additional security challenges in the Persian Gulf – and make no mistake, the end of JCPOA will heighten tensions between Iran and Saudi Arabia – will contribute to a near-term rise in global prices.
The resulting uncertainty will quickly give way to a widening application of competing short and long plays, which, in a whipsaw effect, will result in higher highs and lower lows in the oil price band and make genuine pricing determinations more difficult.
Ask any trader.
Predictability is more important than anything else. Ending JCPOA thrusts the Iranian factor into the center of the equation.
And that will not be a preferable development.
By Dr. Kent Moors
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Whether President Trump stays in the Iran deal or walks away from it is irrelevant to the global oil market or prices. The global oil market has had enough time to factor in the probability of US withdrawal from the deal. A re-introduction of sanctions on Iran will hardly impact the global oil market and oil prices.
Iran’s oil exports will not lose a single barrel of oil as a result of the forthcoming sanctions. Moreover, Iran will be pricing its oil exports and being paid for its exports by the petro-yuan thus bypassing the petrodollar and also nullifying US sanctions. Furthermore, most of Iran’s oil exports go to China and other Asia-Pacific region. Any reduction in imports of Iranian oil by countries cooperating with US sanctions will be more than offset by increases exports to China. China and Russia and probably the European Union (EU) and many countries in the world will refuse to cooperate with US sanctions.
The pre-Iran nuclear deal’s sanctions worked against Iran’s oil exports because of a combination of the EU’s sanctions on global insurance companies insuring Iranian oil cargoes and US sanctions on banking making it difficult for Iran to receive payments for its oil imports in petrodollar.
The EU is not going to walk away from the Iran nuclear deal and therefore it will not be imposing any sanctions on Iran thus further weakening US sanctions and Iran will be using the petro-yuan and the euro for its oil sales thus bypassing the petrodollar altogether.
And while Iran has the option to retaliate against President Trump by restarting some restricted nuclear activities, the Iranian leadership will not fall for that trap so as to expose the United States as the defaulter and also not to give the United States the excuse to start a war with Iran egged by the Israel.
As for Iran withdrawing from the OPEC/non-OPEC production cut agreement, it will have no impact whatsoever. Under the agreement, Iran has agreed not to exceed production beyond 3.75 mbd. In reality, Iran could not increase production beyond that level anyway.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London