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\u2019m not going to tell you), \u201cisn\u2019t a gaping pit. Chaos is a ladder.\u201d<\/p>\n
Well, if that\u2019s true, then investors these days (even if they\u2019re 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.<\/p>\n
This should come as no surprise. Despite last-minute attempts from staff and international allies to salvage some kind of compromise or \u201csoft\u201d withdrawal, it has been clear for a long time that Trump was set to pull out of or at least weaken a deal he\u2019s called the \u201cworst ever.\u201d Once he fired national security adviser H. R. McMaster and installed John Bolton, the writing was on the wall. I\u2019m only surprised, given Trump\u2019s penchant for suspense, that he didn\u2019t rag the puck even longer.<\/p>\n
So the withdrawal should shock no one, but that doesn\u2019t make its outcome any less unknowable. Given all the \u201cwhat if\u2019s\u201d in the media leading up to Wednesday\u2019s announcement, of course, there are a few things we think we know. But they are hardly sure things.<\/p>\n
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\u2019s decision puts that flow in jeopardy. Add in a fresh round of U.S. sanctions implemented this week against Venezuela \u2014 whose production has already been decimated \u2014 and two big sources of supply might end up being taken off world oil markets.<\/p>\n
But will that move the price? Maybe not much. The immediate reaction on the markets to Trump\u2019s announcements was ‘meh.’ Benchmark West Texas Intermediate closed down more than one per cent; European Brent was off, too. Maybe investors had already fully priced in Wednesday\u2019s announcement \u2014 and were selling on news after buying on rumour. Or maybe the path to supply restrictions isn\u2019t so clear-cut after all.<\/p>\n
For one thing, Saudi Arabia, which has led OPEC\u2019s 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.<\/p>\n
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\u2019s plan. Yet Rouhani is seen as a (relative) moderate; any new regime is likely to be more hard-lined against the West. Even short of that, Trump\u2019s 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\u2019s announcement that Iran could \u201cstart enriching uranium more than before.\u201d 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.<\/p>\n
On the other hand, general instability in the Mideast should support oil prices (there\u2019s that ladder again). But much depends on the reaction of the other JCPOA signatories \u2013 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\u2019s decision, continue to abide by the deal.<\/p>\n
How they will make that work is anybody\u2019s guess, since Trump\u2019s 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.<\/p>\n
Still, where there\u2019s a will (and oil), there\u2019s 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.<\/p>\n
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 Trump would be elected the next president. As with his decisions on Iran and, before that, the Paris climate accord and the Trans-Pacific Partnership demonstrate, he just doesn\u2019t really care much about getting along.<\/p>\n
So there is more chaos to come, I figure. The ladder will get higher, creating new opportunities for the brave of heart \u2013 and more room for them to fall.<\/p>\n","protected":false},"excerpt":{"rendered":"
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