Update on Iran Deal from RBC Capital - Aug 25
Posted: Thu Aug 25, 2022 10:19 am
From RBC Capital Research
Iran Nuclear Deal Update: Over to You, Tehran
Update on Iran negotiations as the US submits its response
The White House has submitted its response to the revised Iranian nuclear agreement. The ball is
now in Iran’s court on whether they will accept the deal as it stands, and it is certainly not a “yes”
yet. Administration officials had indicated that significant progress had been made in the Iranian
nuclear negotiations in recent days with Iran walking back some key demands. However, there
remained points of contention and the White House apparently did not accept all the text changes
that Iran made to the draft European proposal. Market participants seeking to gauge when
Iranian barrels will come back in full force will have to wait to see whether the Iranian Supreme
Leader signs off on a deal that does not guarantee sanctions relief beyond January 2025.
> The central reason we remain cautious about the prospects of getting a deal done in the
near term, despite the movement in the talks, is the fact that Supreme Leader Ayatollah
Khamenei reportedly remains a deal skeptic and he is the ultimate decider. Ali Vaez, the
International Crisis Group’s Iran Project Director, contends that the Supreme Leader is
concerned about the political costs of having a repeat of the 2018 sanctions snap back if the
Republicans capture the White House in two years’ time. During our Tuesday webcast with
Vaez, he indicated that President Raisi has apparently come around to the view that the
economic benefits of being able to bring barrels back and receive full economics for these
exports outweighs the political risk of a 2018 repeat experience. Hence, the hardline president
has concluded that the political payoff from even limited sanctions relief is worth pursuing
given the deep economic challenges facing the country, with inflation running at 54% and
triggering public displays of discontent.
> The leaders of the Revolutionary Guards, on the other hand, strongly oppose re-entering
the agreement and rolling back the nuclear advances that have propelled the country to the
brink of breakout capability. Some members of the IRGC also benefit financially from the
sanctions regime given their role in running black market smuggling networks. Vaez warns
that the IRGC could serve as spoilers by escalating their shadow war attacks on Israeli and
other Western interests, making it politically untenable for the White House and European
leaders to pursue a new nuclear deal. We will be watching whether yesterday’s US airstrikes
on IRGC targets in Syria prompt any retaliatory response. < BTW we are actually at was with Iran today.
> Congress is another key wildcard to watch. During his testimony before the Senate
Foreign Relations Committee in May, White House Special Representative for Iran
Robert Malley indicated that an Iran deal will be submitted to Congress for review in
line with Iran Nuclear Agreement Review Act requirements. During the statutory 30-
day review period, Republican critics can be expected to seize on the fact that the new
agreement appears to be weaker than the 2015 one from a counter-proliferation
standpoint. While the 2015 JCPOA agreement extended the timeline for Iran to amass
enough fissile material to assemble a crude nuclear device to one year, the current deal
under consideration would only leave Iran 6 months away from breakout capability. < It is INSANE to allow Iran to get weapons grade uranium.
> We also anticipate that the proposed confidence-building provision to allow Iran to sell
a predetermined quantity (potentially 50 mb) of oil for 45 days in return for freezing
nuclear activities—before returning to full compliance with the deal—could serve as
fodder for deal opponents, including several key Democratic senators. The Justice
Department’s issuing an indictment against a member of the IRGC for plotting to
assassinate former National Security Advisor John Bolton as well as the brutal attack on
Salman Rushdie will also likely ensure an acrimonious review process ahead of the
midterm elections.
> Nonetheless, the White House probably has enough votes to prevent Congress from
blocking a new deal. During the 30-day review period (or 60 days if submitted while
Congress is out of session), Congress could pass a Joint Resolution of Disapproval (JRD)
that would block the president’s capability to lift any sanctions associated with the Iran
deal. While any senator can introduce a JRD, it would require 60 votes to pass, which
may be a tall ask even if the vote is closer than the 58-42 JCPOA vote in 2015 with a
Republican-led Senate. A JRD in the House requires a simple majority, though if passed
in both chambers it may still be vetoed by the president, in which case 67 senators and
290 representatives would be required to override the veto.
> The full return of Iranian barrels to the market, beyond the initial confidence-building
allowances, will require Iran reversing the breaches of the 2015 agreement and the
IAEA verifying that Iran has met its obligations. Once again, Iran will be required to halt
high-level uranium enrichment, dispose of its highly enriched stockpile, disconnect and
store advanced centrifuges, and cease work on alternate paths to plutonium production.
> As we have noted before, we anticipate it being a multi-month process before all the
key energy sanctions are lifted. As was the case in 2016, we expect Iran to first draw
down floating storage while it makes the necessary infrastructure and logistics
adjustments to ramp up exports. It took Iran 3 months to increase exports by 1 mb/d in
2016 from the JCPOA implementation day in January, however we still lack clarity on
when and if we will get to implementation day this time around.
> Finally, we think that OPEC could indeed scale back output once Iranian barrels start
hitting the market as the monthly meeting structure provides a mechanism for rapid
production pivots. While Prince Abdulaziz’s comments this week about a potential OPEC
cut focused on the lack of liquidity and the disconnect between the physical and financial
markets, we think the return of Iranian barrels would be a qualifying event for a collective
strategy shift. An OPEC production cut that reduces the price benefits of the Iran
agreement could in turn erode the political dividends of doing such a controversial deal
for the Biden administration. Such a scenario could cause some heartburn for Democratic
Party strategists ahead of the midterms.
------------------------
MY TAKE: The lingering FEAR that Iran's oil will soon be coming back online is way overblown.
Iran Nuclear Deal Update: Over to You, Tehran
Update on Iran negotiations as the US submits its response
The White House has submitted its response to the revised Iranian nuclear agreement. The ball is
now in Iran’s court on whether they will accept the deal as it stands, and it is certainly not a “yes”
yet. Administration officials had indicated that significant progress had been made in the Iranian
nuclear negotiations in recent days with Iran walking back some key demands. However, there
remained points of contention and the White House apparently did not accept all the text changes
that Iran made to the draft European proposal. Market participants seeking to gauge when
Iranian barrels will come back in full force will have to wait to see whether the Iranian Supreme
Leader signs off on a deal that does not guarantee sanctions relief beyond January 2025.
> The central reason we remain cautious about the prospects of getting a deal done in the
near term, despite the movement in the talks, is the fact that Supreme Leader Ayatollah
Khamenei reportedly remains a deal skeptic and he is the ultimate decider. Ali Vaez, the
International Crisis Group’s Iran Project Director, contends that the Supreme Leader is
concerned about the political costs of having a repeat of the 2018 sanctions snap back if the
Republicans capture the White House in two years’ time. During our Tuesday webcast with
Vaez, he indicated that President Raisi has apparently come around to the view that the
economic benefits of being able to bring barrels back and receive full economics for these
exports outweighs the political risk of a 2018 repeat experience. Hence, the hardline president
has concluded that the political payoff from even limited sanctions relief is worth pursuing
given the deep economic challenges facing the country, with inflation running at 54% and
triggering public displays of discontent.
> The leaders of the Revolutionary Guards, on the other hand, strongly oppose re-entering
the agreement and rolling back the nuclear advances that have propelled the country to the
brink of breakout capability. Some members of the IRGC also benefit financially from the
sanctions regime given their role in running black market smuggling networks. Vaez warns
that the IRGC could serve as spoilers by escalating their shadow war attacks on Israeli and
other Western interests, making it politically untenable for the White House and European
leaders to pursue a new nuclear deal. We will be watching whether yesterday’s US airstrikes
on IRGC targets in Syria prompt any retaliatory response. < BTW we are actually at was with Iran today.
> Congress is another key wildcard to watch. During his testimony before the Senate
Foreign Relations Committee in May, White House Special Representative for Iran
Robert Malley indicated that an Iran deal will be submitted to Congress for review in
line with Iran Nuclear Agreement Review Act requirements. During the statutory 30-
day review period, Republican critics can be expected to seize on the fact that the new
agreement appears to be weaker than the 2015 one from a counter-proliferation
standpoint. While the 2015 JCPOA agreement extended the timeline for Iran to amass
enough fissile material to assemble a crude nuclear device to one year, the current deal
under consideration would only leave Iran 6 months away from breakout capability. < It is INSANE to allow Iran to get weapons grade uranium.
> We also anticipate that the proposed confidence-building provision to allow Iran to sell
a predetermined quantity (potentially 50 mb) of oil for 45 days in return for freezing
nuclear activities—before returning to full compliance with the deal—could serve as
fodder for deal opponents, including several key Democratic senators. The Justice
Department’s issuing an indictment against a member of the IRGC for plotting to
assassinate former National Security Advisor John Bolton as well as the brutal attack on
Salman Rushdie will also likely ensure an acrimonious review process ahead of the
midterm elections.
> Nonetheless, the White House probably has enough votes to prevent Congress from
blocking a new deal. During the 30-day review period (or 60 days if submitted while
Congress is out of session), Congress could pass a Joint Resolution of Disapproval (JRD)
that would block the president’s capability to lift any sanctions associated with the Iran
deal. While any senator can introduce a JRD, it would require 60 votes to pass, which
may be a tall ask even if the vote is closer than the 58-42 JCPOA vote in 2015 with a
Republican-led Senate. A JRD in the House requires a simple majority, though if passed
in both chambers it may still be vetoed by the president, in which case 67 senators and
290 representatives would be required to override the veto.
> The full return of Iranian barrels to the market, beyond the initial confidence-building
allowances, will require Iran reversing the breaches of the 2015 agreement and the
IAEA verifying that Iran has met its obligations. Once again, Iran will be required to halt
high-level uranium enrichment, dispose of its highly enriched stockpile, disconnect and
store advanced centrifuges, and cease work on alternate paths to plutonium production.
> As we have noted before, we anticipate it being a multi-month process before all the
key energy sanctions are lifted. As was the case in 2016, we expect Iran to first draw
down floating storage while it makes the necessary infrastructure and logistics
adjustments to ramp up exports. It took Iran 3 months to increase exports by 1 mb/d in
2016 from the JCPOA implementation day in January, however we still lack clarity on
when and if we will get to implementation day this time around.
> Finally, we think that OPEC could indeed scale back output once Iranian barrels start
hitting the market as the monthly meeting structure provides a mechanism for rapid
production pivots. While Prince Abdulaziz’s comments this week about a potential OPEC
cut focused on the lack of liquidity and the disconnect between the physical and financial
markets, we think the return of Iranian barrels would be a qualifying event for a collective
strategy shift. An OPEC production cut that reduces the price benefits of the Iran
agreement could in turn erode the political dividends of doing such a controversial deal
for the Biden administration. Such a scenario could cause some heartburn for Democratic
Party strategists ahead of the midterms.
------------------------
MY TAKE: The lingering FEAR that Iran's oil will soon be coming back online is way overblown.