TRUMP’S GIFT TO OIL PRICE RALLY

At risk of nerd-splaining, the latest round of uncertainty injected into geopolitics puts me in mind of Game of Thrones and the Machiavellian figure Littlefinger, who never shies away from a little bit of disorder while trying to rise to the top of the Seven Kingdoms. Chaos, he once famously said (I know which season but I’m not going to tell you), “isn’t a gaping pit. Chaos is a ladder.”

Well, if that’s true, then investors these days (even if they’re not into GoT) have a lot of climbing ahead of them, thanks in no small part to President Donald Trump, who on Wednesday withdrew from the Iran nuclear agreement. The United States will now reinstate sanctions against the Islamic republic that existed before the Joint Comprehensive Plan of Action (JCPOA) came into effect in January 2016, and is looking to add more.

This should come as no surprise. Despite last-minute attempts from staff and international allies to salvage some kind of compromise or “soft” withdrawal, it has been clear for a long time that Trump was set to pull out of or at least weaken a deal he’s called the “worst ever.” Once he fired national security adviser H. R. McMaster and installed John Bolton, the writing was on the wall.

I’m only surprised, given Trump’s penchant for suspense, that he didn’t rag the puck even longer.

So the withdrawal should shock no one, but that doesn’t make its outcome any less unknowable. Given all the “what if’s” in the media leading up to Wednesday’s announcement, of course, there are a few things we think we know. But they are hardly sure things.

One is that the U.S. withdrawal should support the current oil price rally. Since the deal went into effect, Iranian oil exports have risen to more than 2.5 million barrels per day of crude and distillates. Clearly, Trump’s decision puts that flow in jeopardy. Add in a fresh round of U.S. sanctions implemented this week against Venezuela — whose production has already been decimated — and two big sources of supply might end up being taken off world oil markets.

But will that move the price? Maybe not much. The immediate reaction on the markets to Trump’s announcements was ‘meh.’ Benchmark West Texas Intermediate closed more than one per cent down; European Brent was off, too. Maybe investors had already fully priced in Wednesday’s announcement — and were selling on news after buying on rumour. Or maybe the path to supply restrictions isn’t so clear-cut after all.

For one thing, Saudi Arabia, which has led OPEC’s production-cut regime, can turn on the taps in a minute (or at least says it can), and no doubt is looking forward to doing so with crude near US$70. From its perspective, and that of other OPEC members who have cut production to maintain prices, the U.S. withdrawal is a big gift.

But it might come with a high cost. If sanctions bite economically, the regime of President Hassan Rouhani could be in jeopardy, which could be Trump’s plan. Yet Rouhani is seen as a (rela- tive) moderate; any new regime is likely to be more hard-lined against the West. Even short of that, Trump’s decision will no doubt fan the flames of anti-U.S. sentiment in Iran, which could well find justification to restart its nuclear program, further raising tensions with Israel. Rouhani warned shortly after Trump’s announcement that Iran could “start enriching uranium more than before.” Outright conflict between Iran and Israel, perhaps with U.S. participation, or between an emboldened Saudi Arabia and Iran, looks more and more like a possibility.

On the other hand, general instability in the Mideast should support oil prices (there’s that ladder again). But much depends on the reaction of the other JCPOA signatories — the so-called P5+1, comprising (beyond the States) France, the United Kingdom, Russia, China and Germany. Technically, the JCPOA remains in effect, and Iran has begun negotiations to see that the non-U.S. signatories, who have roundly criticized Trump’s decision, continue to abide by the deal.

How they will make that work is anybody’s guess, since Trump’s decision has created a situation in which the U.S. could well end up sanctioning its allies. Iranian oil largely goes to China, India and Europe, but now those exports would make their recipients subject to U.S. sanctions once they are fully implemented (which might take weeks or months). And then there are the substantial business and infrastructure deals European firms have made in Iran over the past two years: Those firms could lose access to the U.S. market and to U.S. financial institutions if they continue to do business there.

Still, where there’s a will (and oil), there’s usually a way. Perhaps the Russians, Europeans and Chinese will decide to play hardball with the U.S. over sanctions. That would only add to current worries about a global trade war and to an atmosphere of geopolitical instability that is growing beyond the Middle East.

When the JCPOA was brokered in 2015, few would have predicted that its demise would come at the hands of the U.S. Then again, few predicted back then that Donald Trump would be elected the next president. As his decisions on Iran and, before that, the Paris climate accord and the Trans-Pacific Partnership demonstrate, he just doesn’t really care much about getting along.

So there is more chaos to come, I figure. The ladder will get higher, creating new opportunities for the brave of heart — and more room for them to fall.