Yesterday, US President Trump followed through on promises he made as far back as his 2016 campaign, and he began the process of reinstating sanctions on Iran. This could signal the end of the agreement reached in 2015 between six countries and Iran which was called the Joint Comprehensive Plan of Action (JCPOA).
Oil markets were volatile leading up to the announcement and reacted strongly to different leaks throughout the morning and early afternoon. Prices fell when CNN reported that the President would not end the Iran deal. Oil temporarily went below $74 for Brent and almost as low as $68 for WTI, but then recovered somewhat when another news agency contradicted that report.
Both benchmarks rose after the announcement, but did not reach opening levels before the market closed. Apparently, by the time President Trump made the announcement, the market had already priced in a decision to re-instate sanctions. Despite the potential for one million barrels of Iranian oil per day to leave the market, the price of oil did not rise as a result of the news.
For long term traders, how do the logistics of re-instating sanctions impact the market?
Some sanctions will be fully reinstated after a 90 day period and additional sanctions will be fully reinstated by 4 November, 2018. There is a 90 day period for Iranian financial institutions to cease purchasing dollars. After 90 days sanctions will be reinstated on institutions purchasing and or holding Iranian currency outside of Iran. There will also be sanctions on the purchase of Iranian sovereign debt and on the facilitation of sales of this debt.
This will make the purchase and sale of Iranian oil more difficult because Iran requires that all oil sales go through Iran’s central bank. There are ways to work around using dollars in the sale of oil, but they are not preferred since the dollar is the currency used in the vast majority of global oil transactions.
On 4 November, sanctions will be fully reinstated on Iran’s national oil company, NIOC. Also on that day, sanctions will be reinstated that are designed to prevent carriers from purchasing insurance on tankers of Iranian oil.
This is important, because even if Iran could get around the oil sanctions on the NIOC, customers and shipping companies would be unable to buy insurance from U.S. institutions to cover the risk of transporting this oil. Oil must be insured to be shipped, so these sanctions will further impede any oil exports.
It's possible that European or Chinese institutions will offer insurance for Iranian oil cargos, but the U.S. could attempt to sanction American companies that do business with foreign companies that insure Iranian oil.
Despite the details, the Trump administration seems to be taking a strong stand, claiming that the sanctions will be reinstated immediately, though that’s not exactly how it will work. National Security Adviser John Bolton said the old sanctions are going back into place immediately. Richard Grennell, the new ambassador to Germany, said German businesses working with Iran should wind down operations now.
The US Treasury Department told countries that buy crude from Iran and want an exemption that they should, “reduce their volume of crude oil purchases from Iran during [the 180 day] wind-down period.” The impact of all of these statements is to warn businesses around the world that the U.S. is serious about these sanctions and it is best to comply ahead of time. It would not be unreasonable to expect a 200,000 to 300.000 bpd drop in Iranian exports by November.
This decision also has implications for U.S. relations with North Korea, especially because it comes about a month before a much-anticipated summit between President Trump and the North Korean dictator Kim Jung Un. Secretary of State Pompeo announced an immediate trip to North Korea and the administration is talking to China right now.
If the U.S. can convince China to cut its imports of Iranian oil now (China purchases about 24% of Iran’s oil exports), it could send a strong message to North Korea that the two countries are united in pursuing North Korean denuclearization. Though it could be difficult to convince China to do this, it is not out of the question and if that happens, we could see a marked decrease in Iranian exports very quickly.