U.S. President Trump announced on May 8th that he intends to pull out of the Joint Comprehensive Plan of Action (JCPOA) which aimed at limiting Iran’s nuclear program, thereby preventing it from developing nuclear weapons. Meanwhile, he blamed the former U.S. government of establishing a bad deal when leverage was stronger in the United States and reiterated that he believed JCPOA will not prevent Iran from acquiring nuclear weapons.
What was in the agreement?
The agreement was signed by Iran and six other countries in 2015 after two years of intense talks with the Obama administration.
Under the deal, the Iranian government agreed to three key things:
Reduce the number of centrifuges by two-thirds which are the necessary material for nuclear energy; Cut its stockpile of enriched uranium by 98% and 3.67% enriched uranium enrichment. These are sufficient to meet some of the country’s energy needs, but it is not enough to build a nuclear bomb.
In addition, Iran is required to limit the research and development of uranium and allow the International Atomic Energy Agency (IAEA) inspectors to access its nuclear facilities.
In return for its compliance, all nuclear-related sanctions against Iran were cancelled in January 2016, re-linking the country’s stagnant economy with the international market.
Why is this happening now?
The law requires Trump to regularly prove that Iran has complied with the 2015 agreement and whether to prolong waivers which could ease US and international restrictions on Iran. Last October, President stated that Iran has not fulfilled the spirit of the agreement. In January, he decided not to reintroduce tough economic sanctions against Tehran, but only gave Europe more time to “repair the terrible flaws in the agreement.” And decided not to extend the exemption of Iranian oil sanctions.
What are the consequences for oil prices?
Global markets have become increasingly tight as OPEC and Russia cut production. The group has almost wiped out its inventory surplus and intends to keep it down. Iran is not only the world’s fifth-biggest oil producer but also one of the world’s largest oil exporters, delivering more than 2 million barrels of oil a day to customers in Asia and Europe, so any loss of supply would increase the squeeze.
Iran ships most of its oil exports to Asia, Turkey and Europe
- Crude and condensate shipments from Iran
Source: Bloomberg tanker tracking Note: Average from November 2017 to April 2018
Some analysts predict that this decision will result in a short-term increase in global crude oil prices. Others believe that this decision will not have a major impact on the oil market as the threat of U.S. withdrawal from JCPOA was already built into the price.
Could a new deal be secured?
Trump said he is willing to seek diplomatic solutions to resolve his concerns about the Iranian missile program. Even if a new agreement is reached, it is unclear how they will persuade Iran to sign the agreement and whether the other two partners – Russia and China would agree. However, one thing is certain: if the United States does not have a new agreement, it will implement sanctions again, which gives the administration significant leverage.