The deadline for President Trump to re-certify the Iran nuclear deal and issue a waiver for sanctions is less than two weeks away. All signs point to President Trump declining to grant that waiver, which could kick off a period of heightened tension between the U.S. and Iran. But what comes next? And what does confrontation mean for the oil market?

Oilprice.com decided to put some of these questions to Richard Nephew, who was the Principal Deputy Coordinator for Sanctions Policy at the Department of State for the Obama administration from 2013-2015. He served as the lead sanctions expert for the U.S. team negotiating with Iran on the nuclear deal. He is the author of The Art of Sanctions, and he is currently a Senior Research Scholar at Columbia University’s Center on Global Energy Policy.

Oilprice.com: It seems likely at this point that the Trump administration is going to back out of the Iran nuclear deal. What options does Trump have before him and what comes next?

Richard Nephew: Well, ultimately, he has every option in front of him. He’s constrained his own options with his ultimatum far more than anyone else has. If he backed down, he could return to the status quo and be greeted as a champion.

But, he probably won’t. So, it will be a function of what the State Department and others can provide by way of options, and how those options are interpreted by Bolton and others on their way to the President.

Beyond that, assuming he withdraws, his options will winnow down quickly to whether and how fast to push sanctions, including against U.S. partners and those against whom we are presently pushing a broader trade agenda. That is going to be a constraining function in regard to how much they will do but perhaps not on how much we will demand.

OP: How quickly could Iranian oil be impacted? There will presumably be a phase in period for any U.S. sanctions, so when is the earliest that we will see Iranian barrels off of the market?

RN: We could see barrels off the market within days if people have flexible enough contracts to start making reductions. But, we will likely see shifts in purchasing within the first 60 days or so such that the 180 day reduction requirement can be achieved without having to undertake dramatic cuts at the end of the period.

Of course, this is assuming there is no offsetting purchasing, which is possible but— in my view — should not be assumed. I think that some of the purchasers now (particularly China) will refuse U.S. efforts and may buy more Iranian oil, making our task that much more difficult.

OP: In your February report from Columbia University, you estimated that about 400,000-500,000 bpd of Iranian oil could be disrupted within 12 months. Since the publication of that report, John Bolton and Mike Pompeo have joined the administration. Does that number still look about right? Related: The Top Natural Gas Players In 2018

RN: Yes, because that’s a function of the 20 percent reduction demand. It may be more, it may be less, but the actual demand and dynamics of implementation will be affected more by market issues, decisions on whether to cooperate with the United States generally, and broader purchasing behavior than Bolton or Pompeo.

OP: It will be tough for the Trump administration to build a coalition in the same way that the Obama administration did for sanctions in the lead up to the 2015 nuclear deal. If Trump moves to re-impose sanctions, what will Europe, China and Russia Do?

RN: I anticipate that China and Russia will refuse to cooperate with U.S. sanctions and may even increase their trade with Iran.

Europe will split, with some companies cooperating with U.S. sanctions and others refusing. But, even those cooperating may continue to do as much business as they can. I find it hard to believe there will be the kind of U.S.-EU cooperation as existed in the past, particularly in the context of Trump’s trade war.

OP: Can Iran simply reroute its oil to other buyers, i.e., ship oil to customers in Asia instead of Europe? In other words, will oil supply be disrupted or simply moved around?

RN: Of course they can. And then it is a question of intelligence gathering, diplomacy and enforcement to manage the consequences of this.

OP: Detente might not be the right word, but the U.S. and Iran had settled into a kind of cold peace after the 2015 nuclear accord. The Trump administration is reviving the conflict despite evidence that suggests Iran is complying with the terms of the JCPOA. What might Iran do in response and how quickly could things spin out of control?

RN: I think that Iran will play victim for a short time to try to split the international coalition aligned against it. But, in the end, they will need to restart restricted nuclear activities for domestic reasons.

Things could spin out of control very quickly if this happens in the context of a broader conflict in Syria or if a Bolton-led Trump decision to retaliate takes on a military character.

By Nick Cunningham of Oilprice.com

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