Several months ago, U.S. President Donald Trump delivered an ultimatum on the Iranian nuclear deal:
"Either fix the deal's disastrous flaws, or the United States will withdraw."
Much of my time over the past week has been devoted to assessing the fallout from this widely expected White House decision.
And now, as I expected, the White House made good on that threat. The "other shoe" has dropped.
Despite clear support from French President Emmanuel Macron, German Chancellor Angela Merkel, UK Prime Minister Theresa May, and the European Union to continue the Joint Comprehensive Plan of Action (JCPOA), popularly known as the "Iran nuclear deal," and offset a Trump veto, the deal, as it existed on Monday, is now dead.
The stakes are high, but European positions are not enough.
So let me show you how I think this will ultimately play out - and break down exactly how to play crude oil in the wake of this thing...
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As I said, despite support from every other country involved, the agreement will not survive the United States' defection.
Nonetheless, my contacts in Europe and the Persian Gulf have been active in setting up alternative approaches.
There are two overriding objectives in all of this.
European interests are intent on keeping intact business relations forged between them and Tehran after Washington bails.
You see, much has been accomplished over the past year, including initial steps in major natural gas and liquefied natural gas (LNG) deals.
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Anecdotal information has revealed that over €5 billion in European contracts engineered over the last 16 months are now considered vulnerable, if not endangered, by the JCPOA collapse.
That alone has already resulted in political moves in both Berlin and London to set up hasty countermeasures.
Fact is, there will be European pushback on Trump and any American flight from the treaty.
However, the terrain is also changing in other ways - ways you're not hearing about on the major news or financial news networks.
The Joint Comprehensive Plan of Action, a.k.a. "The Iran nuclear deal" The historic, multilateral accord was agreed to by the five permanent members of the UN Security Council (P5 - the United States, United Kingdom, Russia, China, and France), Germany, the European Union, and Iran. After nearly 12 years of off-and-on negotiations, JCPOA was adopted on July 14, 2015, and came into force on Oct. 18, 2015. Under its provisions, Tehran agreed, for 13 years, to eliminate its stockpile of medium-enriched uranium, reduce its store of low-enriched uranium by 98%, and decrease the number of gas centrifuges essential for the enrichment process by nearly 67%. Additionally, for a period of 15 years, JCPOA provided that Iran would...
In return, the P5+1+EU agreed to begin phasing out (subject to a staged sequence of verifications) some economic and trading sanctions - which were, by 2015, crippling Iran's economy - imposed by the UN, the United States, and the EU. However, during the 2016 presidential campaign, U.S. President Donald Trump heavily criticized JCPOA and pledged to scrap the accord. In his view, matters not part of the agreement, such as Iranian support for global terrorism, continued development of ballistic missile programs, and support for enemies of Israel and Saudi Arabia in the Persian Gulf region, need to be added to the arrangement. With Trump's announcement yesterday that he was refusing to recertify the JCPOA, the deal, as we knew it, is dead.
The most likely outcome from the U.S. pullout is a move to resume American sanctions against those parties involved in the export of Iranian crude oil and natural gas (or LNG), cutting Tehran's access to hard currency and banking internationally, while renewing pressure on shippers and insurers providing coverage for the trade.
Most of those sanctions are still in place. Remember: JCPOA requires an International Atomic Energy Agency (IAEA) confirmation of Iranian compliance resulting in a sign-off by signatories on the other side and a sequenced relaxing of the sanctions.
Trump has, once and for all, clearly refused to sign off.
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On the other hand, the EU, other P5 members, and Germany have attested that Iran is "sticking to the rules" and is following JCPOA requirements.
As of yesterday afternoon, there are three possible scenarios ahead of us right now.
Now, most of my sources say the first "nightmare scenario" is unacceptable, for obvious reasons.
Furthermore, they think the third scenario is how it will shake out, even if that second possibility is what "officially happens" - an outcome viewed as "acceptable," given the realities of the U.S. approach to diplomacy.
However, two regional "wild cards" will no doubt come into play: Saudi Arabia and Israel.
How will they respond?
Riyadh needs as high of a crude oil price as possible to enhance the valuation of the Aramco IPO.
Meanwhile, last week's Israeli presentation, arguing that Iran has evaded JCPOA, provided no new evidence and no clear roadmap to a "post-JCPOA" approach.
That leads at least some in my network to suggest that Prime Minister Benjamin Netanyahu's "PowerPoint trip," as one acquaintance put it, was more for internal and Washington political consumption than anything else.
It certainly did not demonstrate what it advertised.
Which brings us to one of the most critical "responses" of all: how oil traders will react.
Short term, oil-pricing volatility will continue. Traders will likely consider any forward interruption - perceived or actual - in Iranian crude export flow as upward pressure on global prices.
If this happens and JCPOA is not immediately closed, (i.e., should those second and third possible scenarios I mentioned play out), there will be a pullback.
Overall, other factors have been contributing to an increasing floor for the oil-pricing band, supported by continuing OPEC production problems in Venezuela, Nigeria, and Libya.
Absent a decision by Washington to enter into crisis territory, that rising floor may be the most important element in where oil is moving.
Now, short of going head to head with global oil traders, regular investors can use two exchange-traded funds that track the price of the two most commonly traded crude oil benchmarks - the United States Oil Fund LP ETF (NYSE Arca: USO) and the United States Brent Oil Fund LP ETF (NYSE Arca: BNO).
Calls or long positions in both are the most direct ways to play any increase in the price of crude, while puts are the most direct way to play decreases.
However, in light of the growing importance of the "rising floor," I don't expect prices will experience much downward pressure in the long term.
The market has been relentless, unpredictable, and, lately, downright disappointing. Don't expect that to change now that Trump has thrown even more uncertainty into the mix.
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