Get Ready for the Fallout as U.S. Sanctions Deal a "Body Blow"
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Get Ready for the Fallout as U.S. Sanctions Deal a “Body Blow”

by | published June 14th, 2018

I’ve had a fair share of unique experiences in my life, most of which I’m not allowed to talk about due to my connection to the U.S. government.

However, there are a handful of memories that have stuck with me over the years that can serve as important life lessons.

In fact, as I await the schedule for my next round of international meetings, the rising U.S. sanctions problem has already prompted me to recall two lessons that I have passed on to my university students over the years.

The first, choose your fights.

Second, learn how to work with those you do not like personally.

Unfortunately, nobody in the White House seems to have come to the same conclusions.

While we remain at least two months from the imposition of new U.S. sanctions against Iran, the collateral damage is already underway…

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OPEC Has Its Own Agenda

As I discussed on Tuesday, divisions are rapidly developing within the OPEC-Russian agreement to cap production.

Both Russia and Saudi Arabia are jacking up production, seemingly in response to a request from Washington to do so.

Washington is also pressuring Caracas, the capital of Venezuela, with the threat of tightened sanctions.

These will only contribute to the ongoing collapse of Venezuelan oil prospects in the face of a financial meltdown and effective default on both sovereign and national oil company PSVSA bonds.

The U.S. is now worrying that a decline in the availability of Iranian and Venezuelan oil will lead to a major increase in crude prices, which, in turn, will lead to an acceleration in finished oil product prices – a worry for any market interested in sustaining an oil recovery.

And the concern appears warranted.

Yesterday, the Paris-based International Energy Agency (IEA) reported that production in both countries could decline by a staggering 30% in the face of American action.

And Russian and Saudi decisions to increase volume will certainly lead to similar attempted moves by other OPEC members. Yet, given the dynamics within the cartel, other nations’ abilities to profit from raising levels is more constricted.

Anecdotal evidence has been emerging for some time that other OPEC members have been facing difficulties in matching any expected gains from the Saudis.

This is taking the shape of a divided OPEC, driven by a Russian-supported Saudi move.

In addition, there are some significant political shortfalls should that happen, especially in the already fragile Persian Gulf…

The Threat of Sanctions Is Changing the Import Market

Meanwhile, the Trump Administration may have its own domestic shortfall from its own “looking the other way” approach to rising Russian and Saudi production.

A combination of outside increases with approaching export limitations means U.S. shale producers will be flooding the local market, thereby lowering their own price.

And unlike Saudi Arabia and Russia, these affected regions vote in American elections.

Given their widespread support for Trump in 2016, the oil situation is shaping up to be a classic political “shooting oneself in the foot.”

But the effect elsewhere is even more immediate – and likely to be more pronounced.

The prospect of declining exports has prompted major importing nations such as India to ratchet up imports from Iran to levels we haven’t seen in decades. The problem with that is the same as the one experienced during the first period of American sanctions, starting back in 1979.

The main Indian refineries are designed to process Iranian-grade crude, both carrying a higher sulfur content and heavier in weight than most other flows.

India is now desperately increasing stockpiles to offset the early stage of another import crisis – and this time it will face the same problem as the last time:

As sanctions kick in, there will be no easy way to pay for the oil.

In the short term, Russian and Saudi oil will fill the gap, although neither is the same grade as Iranian oil. They also will renew a battle that has been simmering for some time between the two countries over who is destined to control the Asian market.

Back in Venezuela, the economic crisis, accentuated by the prospects of U.S. sanctions, has had a more direct result.

There, the historic decline in PDVSA production has already resulted in large asset acquisitions by both Russian and Chinese interests. New sanctions in Venezuela will merely intensify that fire sale much closer to U.S. shores than Iran.

The imposition of renewed U.S. sanctions against Iran has led to a split with erstwhile European allies made all the more upset by American trade tariffs.

The European parties to the Joint Comprehensive Plan of Action, or JCPOA – also known as the Iranian nuclear accord – namely, the U.K., France, Germany, and the EU – have joined the other two JCPOA participants, Russia and China, in rejecting the rationale for the U.S. leaving the agreement.

Europe is moving to save JCPOA on its own. But without U.S. support, that is not likely to work.

However, there are other serious, and not as visible, fallout from the U.S. decision…

Warning: You don’t have much time left to protect yourself and family from this coming crisis

Iran Is Now a Wild Card

After the signing of JCPOA, Iran had begun work to sign on to other international agreements.

One of the more important is the United Nations’ International Convention for the Suppression of Financing of Terrorism. The Majlis (parliament) had been considering a bill approved last October by the cabinet to become a member of the UN convention.

That came to an end on Sunday.

On June 10, the legislators voted to suspend process of the bill, pending talks with an increasingly wayward government.

As declared by Majlis Speaker Ali Larijani, “We hold in abeyance the bill for two months.”

In other words, the Iranian parliament will not move further on the bill to join the UN convention until it determined whether the U.S. will move forward with renewing sanctions.

In addition to the possible resumption of Iranian nuclear weapons development, we now have no Iranian support for cutting terrorist finance.

Funding terrorism had not been part of JCPOA. And although it is certainly one of the pet peeves in Trump Land, one does not scrap an international agreement that took over a decade to iron out for something that was not part of that accord.

But maybe we can borrow a page from Singapore and the other geopolitical nuclear situation.

Perhaps a 45-minute meeting and a photo op might do the trick.

Sincerely,

Kent

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