The future of the global oil market, and the Iranian economy, were thrown into flux last Thursday after the US ended a sanctions waiver program for several countries, all of them US allies, that had been buying Iranian oil.
The news comes just after the International Monetary Fund released a grim assessment of the future of the Iranian economy, saying inflation is set to rise dramatically this year, putting more strain on already fragile finances, removing a key source of foreign capital for Tehran while making the lives of Iranians even harder.
Since he took office, US President Donald Trump has adopted a hostile stance toward Iran, with US Secretary of State leading the way with a literally religious fervor. National Security Advisor John Bolton, another Iran hawk, was also the diplomatic architect of the Iraq War.
It is difficult to say what the end of the waiver program will bring in the near or long term for global oil markets, but analysts suggest it will naturally make the world’s supply more vulnerable to unexpected shock. Canceling the waiver will affect Spain, Italy, Greece, Turkey, India, China, and Japan, all of which had been purchasing Iranian oil.
“President Trump’s decision to zero out waivers for importers of Iranian oil on May 2 represents an audacious act of oil brinkmanship as the strategy of keeping prices contained now rests almost exclusively on Saudi Arabia’s willingness to open the taps amid accelerating global supply outages,” Helima Croft, Global Head of Commodity Strategy at RBC Capital Markets, wrote in a research note as reported by CNBC.
A deepening concurrent crisis in Venezuela could add another level of political risk premium to the price of oil. This might seem like good news for oil producing countries in the short term. However, with high oil prices reminding US consumers, who will vote for president in 2020, that driving is not free could encourage them to listen more closely to the opposition Democrat party, who have been promoting investment in renewable energy for some time.
The removal of Iran oil sanctions waivers represents a pillar of his administration’s philosophy of international relations, and has remained an unchanging demand from Trump’s base.
It is not clear whether Saudi Arabia will increase oil production to make up for the dip in global oil supply, between 700,000 and 800,000 barrels of oil per day, RBC’s Croft told CNBC on Thursday. Russia, for its part, will not ramp up oil production to make the difference.
“The question is can President Trump get the countries in OPEC to basically put more barrels onto the market,” Croft told the channel. “Last week he said he called OPEC and said he spoke to the Saudis. People here question whether that call took place.”
Politics in the US are something the oil sector must pay attention to now more then ever. For example, if Trump’s successor is a Democrat, they might try to pick up where Democratic President Barack Obama had left off on Iran policy.
If they win the White House next year, Democrats have vowed to restore the terms of the nuclear deal with Iran.
Trump and his Republican Party for years have been saying the Iran deal did not go far enough, as Iran was still able to rescue the regime in Syria, loom large over Iraq, and mobilize its Hezbollah militia in Lebanon, a source of endless frustration for the leadership of Israel, which sees Iran as an existential threat.
Also, and although there are some clues, the future of the US relationship with Israel in a post-Trump era is difficult to predict.
It could range between something close to the status quo and something wildly different, with a chance of returning to a more frosty relationship under a Democratic president. Israelis themselves have a far more positive view of Trump than most other countries.
Netanyahu will more than likely be in power in January 2021, when a new US president takes office.
A Democratic president could also bring a far more skeptical attitude towards Saudi Arabia, which has enjoyed intimate access to the Trump administration since he took office.
Democrats freezing out Riyadh, at least in public, would be in line with doing the exact opposite of everything Trump did.
Indeed, nothing seems guaranteed about US foreign policy or politics any longer. It has been decades since US policy towards Israel threw oil markets into sudden and severe disruption. Now, that volatility could come back, but in a way that would have sounded absurd just ten years ago.
As part of their campaign platforms, US presidential hopefuls are starting to voice criticism of Israel’s treatment of Palestinians.
One of the frontrunners, Vermont Senator Bernie Sanders, has said Netanyahu runs a “racist government” that has made common cause with the extreme right and proposed the outright annexation of occupied Palestinian territory.
That kind of rhetoric from such a prominent political figure is unprecedented in primary politics.
A win by his more mainstream rival, former Vice President Joe Biden, would not represent such a sharp shift, but could still have consequences no machine learning algorithm could predict.
A Democratic presidency immediately following Trump’s would take measures that, in the long term, could both increase supply and decrease demand for petroleum. A renewed Iran deal would put Iranian oil back on the global market, and a sudden renewed commitment to meeting emissions-reduction obligations under the Paris Climate Treaty.