State Department Thinks 'Zero' Sounds About Right When It Comes To How Much Iranian Oil Allies Should Be Importing By November 4

This should be fine, because it's not like the U.S. is at odds with any of these buyers on anything.
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Back in May, when Donald Trump announced that the U.S. would be pulling out of the Iran nuclear deal, he had a ton of support for his decision from all parties to the JCPOA.

...

I'm just kidding.

Everyone thought it was a terrible decision and let's face it, Netanyahu’s "Iran lied" presentation was nothing more than a cover story for Trump, conveniently delivered two weeks ahead of the decision.

That decision has all manner of geopolitical implications and it dovetails nicely with Riyadh's push to curtail Tehran's regional influence, which has grown over the past several years thanks to Hezbollah's success in propping up the Assad regime in Syria. Throw in the Quds' stranglehold on Iraqi politics (and Iran has apparently worked something out with al-Sadr on that front) and the resilience of the Houthis in Yemen, and you've got a particularly annoying situation for the Saudis, who were thus more than happy to throw their support behind Trump.

From a purely market perspective, the Iran decision posed something of a quandary for the President to the extent it meant traders were likely to embed more geopolitical premium in crude prices, which were already rising. The higher oil went, the more likely it became that rising prices at the pump would end up eating away at the gains that accrue to U.S. consumers from the tax cuts.

Those concerns "informed" (and I use the scare quotes there because using the term "informed" in the same sentence as the word "Trump" is almost always a paradox) Trump's push to convince the Saudis to increase production in the back half of the year in order to effectively cap oil prices.

But again, there was more than a little irony there. Trump's own decision to poke the Iran hornet's nest was in part responsible for rising oil prices, so the back-channeling to convince OPEC to raise production was yet another example of the administration's policies working at cross-purposes or otherwise tripping over themselves.

Ultimately, Trump was successful in effectively commandeering last week's OPEC meeting and Iran's attempts to veto an output hike were unsuccessful.

On Tuesday morning, the following headline underscored Riyadh's determination to follow through:

  • SAUDIS ARE SAID TO PLAN RECORD OIL OUTPUT OF 10.8M B/D IN JULY

That headline (it hit at roughly 10:30, AM) triggered a quick dip in crude prices, but it would be overshadowed just an hour later by news that the Trump administration is pressuring its allies to cut Iranian oil imports to zero (that's "zero" as in "none") by November 4. That's according to an official from State.

Here's a bit more from Bloomberg's coverage:

In a briefing Tuesday, the State Department official said that while the administration wouldn’t rule out waivers or extensions to the November deadline, which was previously announced, it isn’t discussing them either.

The official, who spoke on condition of anonymity, said the U.S. was planning conversations with the governments of Turkey, India and China, all of which import Iranian oil, about finding other supplies. The official said an important part of those discussions was making sure countries aren’t “adversely affected” by cutting Iranian oil imports.

Crude promptly surged:

WTI

As a reminder, there's rampant uncertainty about exactly what the future holds for Iranian barrels in the face of U.S. sanctions. While OPEC can plan for Venezuela disruptions, it's difficult to "plan" anything with regard to Iran due to the ambiguity around U.S. policy and due to the possibility that the oil will find its way to markets one way or another.

"In 2012-2013, Iran opened up accounts in local currencies in buying countries that it then used to finance imports," Barclays reminded investors back in May, before going to to note that "if China, India, Japan, and South Korea do not impose sanctions on the Central Bank of Iran, these countries would be unlikely to stop taking Iranian oil and could serve as an offset to European buyers that would wait to see how the sanctions regime looks."

So there's that. And here's BofAML's take from a note out last week:

On the one hand, reported Iran crude exports have yet to decline in any meaningful way [as] Iranian exports averaged 2.4mn b/d in both in April and May as the National Oil Company squeezed barrels out of the country, presumably concerned about the turn in US politics. But there [are] a number of floating vessels off the Iran Persian gulf that are starting to show up, as insurance and freight challenges are already starting to disrupt flows ahead of the November deadline.

If you go back up and read those excerpts from Bloomberg's coverage again, it looks like Trump is going to try and pressure non-European buyers in addition to Iran's European customers.

Obviously, this adds still more uncertainty to the outlook as these discussions will be set against a backdrop that finds Trump at odds on trade with literally everyone involved.

Meanwhile, if this ends up pushing oil sustainably higher despite Riyadh's best efforts to offset market angst, we'll be right back in the same ridiculous situation we were in prior to the OPEC meeting where Trump is simultaneously i) driving up prices at the pump by turning the screws on Iran, ii) driving down prices at the pump by pressuring the Saudis to increase production, and iii) driving up prices on the cars that fill up at those same pumps with tariffs.

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