US hardens stance on Iran but tries to quell oil price concerns: Fuel for Thought

On April 22, the Trump administration dropped its focus on global oil prices, abandoned its already dubious goal of US energy dominance and learned to love hardline policy idealism over economic pragmatism.

That was the day the US said it would push to end all Iranian oil exports, refusing to extend waivers to Iran's biggest crude and condensate buyers that had been allowed to import some Iran crude despite sanctions.

The decision was a shock to market and policy analysts who had almost universally anticipated that these waivers would be at least partially renewed through the summer to prevent a jolt to oil and domestic gasoline prices and global supply. The announcement pushed crude futures prices to six-month highs and could soon push Brent above $80/b for the first time since October 2018, according to S&P Global Platts Analytics.

The end of sanctions waivers indicates that the policy hardliners in the Trump administration, led by John Bolton, President Trump’s national security adviser, may have won over the more financially-grounded views of Pompeo and White House economic adviser Larry Kudlow, who had resisted the end of waivers, arguing that the impact on prices may be politically untenable.

A policy decision with such a direct impact on prices seems like a dramatic turn for an administration which had laboriously crafted sanctions and other administrative actions to minimize the impact on energy prices.

On the Friday before the Iran sanctions announcement, for example, the White House issued a statement on Trump’s phone call with Khalifa Haftar, head of the Libyan National Army, where Trump recognized his efforts in "securing Libya's oil resources."

Revealing the details of the phone call, which had taken place four days earlier, on a Friday when futures markets were closed due to the Easter holiday, seemed a deliberate attempt to dull the price impact of Trump’s apparent turn away from the UN -backed Government of National Accord as fears of a supply disruption in Libya grow.

Politics trumping prices

"With average regular pump prices approaching $3/gal, rising over twice as fast as usual heading into driving season, and having erased about 90% of their big drop since last October — a 'tax cut' he took credit for by twitter on January 2 — President Trump is naturally worried about another spike in oil prices ," said Bob McNally, president of Rapidan Energy Group.

But the Iran waivers announcement may have shown that Trump may not be as hyper-focused on US gasoline prices as many had assumed.

Perhaps, Trump is banking on the short-term memories of American voters and believes that gasoline prices in the summer of 2020, when campaigning for the US presidential election will be reaching a fevered pitch, are the prices to be concerned about.

Or, perhaps, Trump believes that the price impact of his decision to end Iran sanctions waivers will be minimal and short-lived. To arrive at this conclusion, however, the president must have received firm assurances from the Saudis , UAE and, potentially other producing countries, that they would ramp up output to meet any potential supply shortfall.

“I think Trump may have believed that he could have it all,” said Helima Croft, global head of commodity strategy for RBC Capital Markets. “Punish a foreign policy adversary and keep gas prices in check.”

On Friday, as he headed to Air Force One, Trump told reporters that, in fact, he could have it all.

"The gasoline prices are coming down," Trump said. "I called up OPEC. I said, 'You got to bring them down. You got to bring them down.' And gasoline is coming down. We're doing great."

But Trump’s plans hinge on a Saudi production surge which may never arrive, Croft said.

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Will the Saudis pump more?

Many in the administration want the market to believe that it will arrive, however.

“We have commitments from oil producing countries, including the Kingdom of Saudi Arabia and the United Arab Emirates, to increase oil production to offset reductions in Iranian oil exports,” the State Department said in an April 22 fact sheet on the “maximum pressure” campaign on Iran.

“We think that the market is well-supplied and will continue to be well-supplied,” Francis Fannon, the assistant secretary for State’s Bureau of Energy Resources, told reporters that day.

But the Saudis were far more cautious, giving no indication that they were readying an output surge this summer, nor doing anything outside their ordinary course of business.

Saudi energy minister Khalid al-Falih said only that the kingdom would "coordinate with fellow oil producers to ensure adequate supplies are available to consumers while ensuring the global oil market does not go out of balance," according to a statement carried by state-run newswire SPA.

While the US could offer few details on just how, exactly, the Saudis and other Middle East producers may counter the sudden loss of Iranian barrels from the global market, the signal from the White House was clear: the US cannot achieve market balance, or at least relatively stable prices, on its own.

What about Venezuela?

Could this hardline move on Iran policy be merely an opening act, where the US moves towards stronger sanctions actions, in Venezuela, for example, despite the likely bullish reaction in price?

The victory by administration policy hardliners may, ultimately, be short-lived. OPEC and other producing countries, led by Russia, may decide to extend their 1.2 million b/d supply cut pact further when they meet in June, likely driving prices up further.

Output in Libya could crash again, Venezuela’s oil sector might fully collapse, and infrastructure constraints could cap US supply growth. Like the US’ Iran sanctions policy this week, it could all change in an instant.

Only time, and oil prices, of course, will tell.