NS4960 Spring Term 2018 Nuclear Deal Withdrawal and Oil Markets https://www.bloomberg.com/view/articles/2018-05-10/iran-oil-sanctions-trump-has-some-room-to-ease-off

Overview Oil markets have not reacted much to President Trump’s decision to withdraw from the 2015 No panic so far – spot market price finished the day of the announcement just two cents higher Surprising since sanctions will be tough and Iran one of the world’s largest oil producers A number of reasons for oil market reactions Case shows difficult to anticipate oil price consequences A number of variables at play affecting future oil prices. A spectrum of policy response on the part of the U.S., Europeans, and China.

Reasons for Little Market Movement Markets may have already priced in Trump’s decision May also reflect that market sees November when sanctions on those importing Iranian oil will come into effect as far away Also sufficient spare capacity in system to fill in any gaps that may arise Saudi Arabia has already declared willingness to use its capacity to smooth markets if needed Sanctions could provide OPEC and its non-OPEC partners a graceful exit to their ongoing agreement to cut production, without jolting the market Markets may be confident about U.S. production from shale and that higher oil prices will prompt greater domestic production relatively quickly

Factors that Could Increase Prices I Three things that could end market’s complacency in coming months First while markets may have priced in the Iran deal, they may not have for Venezuela Venezuelan presidential election scheduled for May 20 – if observers conclude it corrupt, US and others could increase sanctions reducing supply of oil While may be sufficient spare capacity for Iran, much more difficult for Iran and Venezuela

Factors that Could Increase Prices II Second U.S. and Saudi Arabia may not exactly agree on what is needed to maintain oil market stability Saudi Arabia’s interest in seeing global oil price of $80 or more may make that country slow in reacting to Iranian or Venezuelan supply disruptions Third, the risks to oil markets from Trump’s decision are not simply in removing Iranian exports from the market tensions may mount further in Iraq, Lebanon, Syria and Yemen A general increase in geopolitical risk which could add to oil prices

Factors that Could Increase Prices III If oil prices to increase significantly, U.S. has the option of not imposing sanctions at the end of the “wind down” period. First, the legislation on oil exports allows administration to offer exemptions to entities that are based in countries that have “significantly reduced” imports of Iranian oil Significant is very flexible -- China and India received exemptions under Obama after U.S. negotiations put pressure on countries to reduce consumption. Given gutting of State Department, U.S. not in a position to carry out such a diplomatic effort

Factors that Could Increase Prices IV Second – U.S. could take advantage of clause that allows the administration to make a determination that global oil markets are too tight for sanctions to be imposed Price spike might hurt the economy Other factors China may simply ignore sanctions and increase imports from Iran. China is Iran’s largest export market. With U.S. imposing tariffs on China, country unlikely to cooperate with U.S. European countries may shield firms from U.S. secondary sanctions – argue that Iran was in compliance with agreement

Factors that Could Increase Prices IV Might Iran return to negotiations if threat of sanctions likely to harm economy IMF estimated country’s non-oil growth was 4% in 2017. Still Iranians have not seen as robust an economic recovery as many expected to follow JCPOA’s implementation The expectation that the U.S. would restore nuclear sanctions discouraged trade and investment So did a wide range of U.S. sanctions unrelated to nuclear program Economic stagnation and rising inequality drove a week of widespread protests that began at end of 2017. Sanctions may give regime increased domestic support

Factors that Could Increase Prices V However factors unrelated to sanctions also hampering recovery Corruption Mismanagement Ageing infrastructure and Relatively low oil prices following 2014 market collapse With likely higher prices for oil possible with sanctions, Iran may decide on reforms and possibly increase its rate of growth.