This might affect Crude Oil (and oil company such as SDRL): What’s Next as Trump Eyes Iran, Russia?

Iran: Sanctions Snap-Back?

The potential reinstatement of US extraterritorial sanctions on Iran is one of the clearest policy implications of the Trump victory. Throughout the campaign, Trump repeatedly denounced the 2015 Joint Comprehensive Plan of Action (JCPOA), which suspended the most punitive measures on the Iranian energy sector. For example, during a March speech before the lobby group AIPAC, he declared that his “number one priority” would be to “dismantle the disastrous deal with Iran.”

One of the easiest ways for sanctions to come back into force would be for President Trump to refuse to certify Iran as compliant with the agreement. The bulk of the US energy sanctions on Iran were imposed by Congress, not the White House, and unlike the EU measures, they have only been waivered, not revoked. A key piece of legislation, The Iran Threat Reduction Act of 2012, prohibits companies from providing Iran with technical knowledge or equipment to develop its petroleum resources and refined petroleum products, bars the provision of insurance or reinsurance services to Iranian oil companies or tankers, and blocks the provision of vessels or services to Iran’s shipping sector. Additional legislation required consuming countries to make significant reductions in Iranian crude imports every 180 days. As US companies were banned from operating in Iran after the 1979 hostage crisis and the US imported no crude from Iran from then on, these measures were specifically aimed at foreign entities and essentially forced them to choose between remaining active in Iran and being able to access US capital markets.

The Iran Nuclear Agreement Review Act of 2015 requires the US president to certify that Iran is “transparently, verifiably, and fully implementing” the nuclear agreement every 90 days. In the event that the president fails to submit a certification or finds that Iran has breached the agreement, both the House and the Senate will prepare qualifying legislation to reinstate the suspended Congressional sanctions. Given that Congress was consistently more hawkish on Iran than the Obama White House and the continued Republican control of both chambers, we believe that President-Elect Trump would face limited pushback if he chooses to tighten the sanctions noose around Iran. Even though the European Union energy sanctions have been formally lifted, the snap-back of US sanctions could certainly curb the enthusiasm of foreign companies looking to invest in Iran’s energy sector and thereby limit Iran’s ability to significantly ramp up output from current levels in coming years.

Russia: Ready for a Reset

President Vladimir Putin was one of the first foreign leaders to publicly congratulate Trump on his electoral success. In that context, a reset in relations between Washington and Moscow could be in the offing, presenting important implications for investment in the Russian energy sector. In response to Russian military actions in Crimea and Ukraine in 2014, President Obama issued executive order 13662, which imposed a range of financial sanctions on Moscow. With regard to energy, the Presidential directive prohibits US companies from providing goods, services, or technology in support of exploration or production of Russian deep-water, Artic offshore, and shale projects. As the Russian sanctions originated in the executive branch, not Congress, the President has wide latitude to remove them at his discretion. Given that Trump has called for better relations with Moscow, and some of his senior advisors have strongly criticized the Russian energy sanctions, we believe that these measures could be revoked by the incoming administration. This would be beneficial for the development of these greenfield projects and would put US companies on more equal footing with their European counterparts when it comes to operating in Russia. While the EU introduced nearly identical restrictions, it grandfathered contracts concluded prior to September 2014.

Oil: US Market Implications

Despite initial weakness overnight, oil prices recouped losses and have trended in a relatively narrow range during US market hours. Oil, like other assets, will not be immune from choppy, sentiment-driven trading in the coming days. Rhetoric from the US president-elect favors the oil and pipeline industry and has broad constructive read-throughs for oil demand, and thus prices, despite the ambiguous nature of significant pillars of his energy policy. While much of the market focus has centered on the idea that a Trump administration will seemingly give the nod to US oil producers, we highlight that much of the supply-side policymaking aparatus resides at the state level rather than at the federal level. Thus, we think that some of the outsized effects instead reside on the demand side of the equation.

While over the past two years cheap prices at the pump stimulated US gasoline demand, OECD oil demand has largely been in a structural decline since the recession. In that context, we were of the view that the uptick was a temporary phenomenon, as regulations presented material roadblocks to further growth. Now, however, the following merit watching:

• Repeal of Key Regulations: A Trump-led repeal of several key legacy regulations (namely Obama’s Corporate Average Fuel Efficiency standards and Renewable Fuel Standard) could lengthen gasoline’s day in the sun.

— Corporate Average Fuel Efficiency Standards (CAFE): Broad efficiency gains in vehicles will likely continue regardless of the change in administration, but perhaps not at the rate laid out by Obama’s ambitious plan. Currently, the average vehicle in the US has an efficiency rate of 26 miles per gallon (mpg). President Obama’s aspirations to nearly double efficiencies to 54 mpg by 2025 represented a structural shift in the US gasoline demand landscape. Simple logic suggested that gasoline demand would fall materially under that policy. While vehicle efficiencies will likely improve over time anyway, if key regulations are repealed by Trump, then the structural downshift in gasoline demand could have a flatter slope.

— Renewable Fuel Standards (RFS): In an effort to combat emissions, the RFS mandated that a percentage of transport fuels contain a minimum volume of renewable fuels. In other words, 10% of the gasoline cut stemmed from ethanol. It is clear that US gasoline demand would make a lockstep shift higher in the event that renewable fuel standards are lifted.

• US Gasoline Demand: The potential impact of a Trump presidency on US gasoline demand is not one that should be underestimated. After all, US gasoline demand comprises nearly 10% of total global oil demand and has been the sole bright spot in the OECD region, which has otherwise been structurally trending lower. The potential repeal of aforementioned regulations is unlikely to make a difference in his first 90 days in office, but it is a rather bullish potential catalyst in the quarters and years to come.

Broadly speaking, Trump’s energy policies remain relatively short on comprehensive details. His call for weaning the US from OPEC oil imports appears particularly challenging, as while global oil trade is fungible, certain US refiners will continue to demand a certain type of barrel (for reasons stretching from the familiarity of the crude to production of a better refined yield). In a similar vein, Trump’s vision to materially revive the US coal industry would also be difficult. While progressive climate policies have accelerated the demise of the coal industry, there is much more at play, namely economics. Cheap natural gas prices and aging US coal plants nearing the end of their useful lives mean that returning US coal to its heyday will likely prove unlikely.