Donald Trump has vowed to bring Iranian oil exports to zero. Bijan Zanganeh, on his part, says he’s “very hopeful” of improving the Islamic Republic’s crude exports. The truth is somewhere between what the U.S. president and the Iranian oil minister are saying.
After a year of saber-rattling that culminated in Tehran’s blowing up of a U.S. surveillance drone that almost brought the two countries to war in June, oil traders still aren’t sure how to price geopolitical risk stemming from the sanctions-nuclear political chess featuring the Trump and Rouhani administrations. The drone attack aside, Iran has been accused of multiple raids on Saudi and UAE tankers in the Strait of Hormuz, all of which it has denied.
Traders aren’t any wiser on how this will all end for oil, and whether there’d be a winner in the end.
Iranian Enigma Second Only To Trump Wildcard On Oil
Uncertainty over how the U.S.-Iran showdown will play out is one reason for oil’s inability to reprise April’s highs of above $66 per barrel on U.S. crude and above $75 on Brent. This despite the prime architects of OPEC+—Saudi Arabia and Russia—agreeing last week to extend until March 2020 the pact for the 24 oil producers to jointly cut output by 1.2 million barrels per day.
The Iran enigma is second only to the Trump wildcard on oil, which itself is a major bearish factor for the market given the president’s wish for low U.S. gasoline prices ahead of his bid for reelection in 2020. That the U.S. commander-in-chief wants cheap oil while trying to shut down a country that used to be OPEC’s fourth-largest provider is mind-boggling to even the most astute energy observer.
On his part, Trump has imposed almost every imaginable sanction on Iran, its President Hassan Rouhani and even its Supreme Leader, the Ayatollah Ali Khamenei - to extract a promise that Tehran has no evil plan to build a nuclear bomb. Incidentally, this is what the Islamic Republic had agreed to four years back with Trump’s predecessor, Barack Obama.
Instead of crawling toward the negotiating table to seal a new deal with Trump, the Iranians have decided to enrich uranium beyond the purity threshold they agreed to in the 2015 nuclear deal with the Obama administration and other Western powers and China.
Trump, never short of colorful expressions—especially in times of conflict—said on Sunday:
"Iran better be careful. Because you enrich for one reason and I won't tell you what the reason is. But it's no good; they better be careful.”
Iran Might Be A Tougher Nut Than Any Trump Has Cracked
For all his tough talk, the president maintains that he wants diplomacy with Iran, waving the typical combination of carrots-and-stick he had used in other crisis situations with China, Mexico and North Korea. But the Iranians might be a tougher nut than any Trump has cracked, dismissing all his overtures.
And as if things weren’t complicated enough, Britain seized an Iranian supertanker off the coast of Gibraltar last week, throwing the U.S.-Iranian crisis into new international territory. Local authorities said the Grace 1 was believed to be carrying over 2 million barrels of oil to Syria, in violation of EU sanctions on the war-stricken country. Hard-liners in Iran have demanded a British oil tanker be seized in response. Spain, meanwhile, said the seizure came at the request of the U.S.
Tehran, which has long maintained that its uranium enrichment and research is for non-military use, says it will only return to talks if the U.S. sanctions are abolished and it is allowed to go back to exporting the volume of oil it did before Trump’s intervention in the 2015 deal.
Industry sources told Reuters last month that Iranian crude exports had dropped in June to 300,000 barrels per day or less, after Washington tightened sanctions on the country’s oil exports in May. In April 2018 exports stood at more than 2.5 million bpd.
Trump’s sanctions have also bit into other energy projects in Iran. France’s Total (NYSE:TOT) and China National Petroleum Corp (CNPC) halted investment in phase 11 of the country’s giant South Pars gas field last year after the U.S. threatened to target not just governments but also companies that do business with Tehran.
Who Will Blink First?
Iran, so far, has put on a steely face amid the crisis. Zanganeh told state TV: “I am very hopeful that our oil exports will improve.”
He said his administration was also talking with CNCP to resume its interest in the South Pars gas project:
“China is a friend of Iran and the latter would not opt for severing ties for foot-dragging in projects. We are seeking alternative solutions.”
China, a signatory to the 2015 nuclear deal, has condemned Trump’s exit from the deal.
All these bring to question who has the higher endurance in this standoff: Trump facing an Iran with growing nuclear capability or Iran facing a U.S. president who has at least 16 more months in office to make good on his promise of inflicting “maximum pain” on the Middle Eastern country?
My guess is as good as yours.