What Trump's New Appointment Means For Oil Prices

Oil & Gas
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Monday, March 26, 2018  06.32PM / By Nick Cunningham of Oilprice.com   

President Trump fired his National Security Advisor H.R. McMaster on Thursday and replaced him with a staunch proponent of war. The appointment significantly raises the odds of a clash with Iran and North Korea, and almost certainly will result in the withdrawal of the U.S. from the Iran deal. 

John Bolton was a fierce supporter of the 2003 war in Iraq, and comes to the White House as an unreconstructed proponent of the invasion. In fact, one would be hard pressed to name a proposed war that he has not supported. In the past, he has repeatedly advocated for military conflict in both North Korea and Iran, preemptively, and that remains the case today. 

Recently, the U.S. has been negotiating with European officials over how to amend the Iran nuclear deal to appease Donald Trump. Germany, the UK and France have entertained stepping up some measures –related to Iran’s ballistic missiles program, the end date of the limits on the nuclear program and the authority of international nuclear inspectors – with an eye on keeping the U.S. in the agreement. 

The WSJ reports that the U.S. wants the deal extended in perpetuity, but Europe says that would amount to a renegotiation of the entire deal. The sticking point leaves plenty of room for the hardline U.S. government to find a pretext to withdraw from the deal. That was the case before John Bolton’s appointment. With John Bolton now chirping in Trump’s ear, few expect the Iran deal to survive in Washington. 

Last year, Bolton released a blueprint on how the U.S. could and should get out of the deal, a deal that he called “a threat to U.S. national-security interests.” In the plan, he says “unilateral U.S. sanctions should be imposed,” and he also said “we will discuss military options.” He explicitly says the U.S. should provide assistance to a variety of opposition groups in Iran, stopping just short of a full-throated endorsement of regime change, although that was clearly implied. 

Needless to say, Bolton’s appointment as National Security Advisor likely means the end of U.S. involvement in the Iran nuclear deal. The deadline to extend a waiver on sanctions is May 12. 

"Bolton is an unrepentant advocate of regime change against Iran and his demands for the May 12 ultimatum -- in a practical sense -- will be sharper than those of McMaster," Richard Nephew, a principal deputy coordinator for sanctions policy at the State Department during the Obama administration, told S&P Global Platts. Nephew authored a recent report that estimated that Iran could lose 400,000 to 500,000 bpd if U.S. sanctions were re-imposed on Iran. 

Trump seemed to telegraph his intentions on Tuesday. "A lot of bad things are happening in Iran," Trump said on March 20 just before meeting with Saudi Crown Prince Mohammed bin Salman. "The [Iran nuclear] deal is coming up in one month and you will see what happens." 

Ultimately, at this point, U.S. sanctions on Iran are likely, and in a worst-case scenario the U.S. could begin exploring military options against Iran. To say the least, the risk of war is much higher after Bolton’s appointment. 

Meanwhile, a similar scenario is possible for North Korea. Bolton wrote an op-ed in February titled “The Legal Case for Striking North Korea First,” and last year he said on Fox News "I think the only diplomatic option left is to end the regime in North Korea by effectively having the South take it over." President Trump’s much-hyped sit-down with North Korea’s Kim Jong-un may not happen, and the odds of a military strike are now much higher. 

If Trump meets Kim Jong-un, it should “be a fairly brief session where Trump says: ‘Tell me you have begun total denuclearization, because we’re not going to have protracted negotiations. You can tell me right now or we’ll start thinking of something else,’” Bolton said earlier this month. That “something else” was clearly a reference to a preemptive military strike against North Korea. 

The U.S.-North Korea summit is supposed to take place in May, the same month that the U.S. could scrap the Iran nuclear deal and re-impose sanctions. May is shaping up to a fateful month for U.S. foreign policy. 

The fallout could have wide ramifications for the oil market – a lot of oil supply could be put at risk this year after the dramatic reshuffling of the U.S. government over the past two weeks, which has created  “the most radically aggressive foreign policy team around the American president in modern memory,” according to the New York Times

Moreover, it could occur at a time when the oil market is getting tighter anyway, raising the odds of much higher prices. "We are only 3-4 weeks away from peak refinery maintenance, after which crude and product demand should accelerate ... Global inventories are already at the bottom end of the five-year range. With the inventory cushion largely gone, oil prices will likely be more sensitive to geopolitical risk factors," Morgan Stanley said in a research note. "There are sufficient reasons to expect oil prices to strengthen further from here, and we stick with our (Brent) $75 per barrel call for Q3," Morgan Stanley said. 

That could be a conservative estimate if Bolton succeeds in pushing the Trump administration in a much more hawkish direction, as seems likely. 

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