Published: Mon, May 14, 2018
Finance | By Claude Patterson

Higher gas prices could spoil Trump's tax cuts

Higher gas prices could spoil Trump's tax cuts

On 9 May, both the United States and Brent crude futures surged by more than $2/bbl on 9 May, with strong expectations that the gains would continue.

As @realDonaldTrump said, United States sanctions will target critical sectors of Iran's economy.

Trump also announced that the U.S. re-imposes the "highest level of economic sanctions" on the Islamic Republic, including the sanctions against the country's oil sector.

France's biggest bank, BNP Paribas, was fined $8.9 billion in 2014 for breaking sanctions against Iran and other countries.

Trade data already shows a reduction of Iranian oil supplies to Japan and South Korea, and refinery sources confirmed they had started shifting purchases to other suppliers in preparation for renewed sanctions.

He added that "unless there are some production increases from the OPEC/Non-OPEC accord to offset the drop in Venezuelan production, and the expected decline of the Iranian output, prices could be in for a significant leg higher".

In some cases, to go around the sanctions, some Iranian cargoes had to be re-routed to the UAE before heading to China, resulting in higher shipping cost, she said. There was no talk of future efforts to "improve" or "fix" the deal. The sanctions will not only bar U.S. companies from doing business with Iran, but they also will hurt foreign companies by prohibiting them from using American banks unless they cut links with Iran. This is a very important point.

The US leader is increasingly surrounded by hawkish voices like those of his new national security adviser, John Bolton, and his secretary of state, Mike Pompeo.

Analysts had little hope that opposition to the U.S. action would prevent sanctions from going ahead.

"I think they're going to be looking at a choice of doing business with Iran or doing business with the US", Brain O'Toole, a senior fellow at the Atlantic Council told i24NEWS.

New sanctions will likely include measures against Iran's oil and shipping sectors, said Ehsan Khoman, head of research for Middle East and North Africa at Mitsubishi UFJ Financial Group, with 180 days for those industries to adjust. For the companies involved, even those with minority state ownership, this is a business decision, and their governments' diplomatic stance will not be the deciding factor.

US drivers who have noticed higher prices at the pump may be tempted to blame Trump's Iran decision, but it's only one factor at play right now.

China nearly certainly will not comply with this sort of diktat by the USA, though the Chinese government may not explicitly state this intention. "That's what we want to do again". USA oil production is skyrocketing, though output in the oil-rich Permian Basin is being limited by pipeline shortages that could last until late 2019.

Many analysts in Europe said they are dismayed by Trump's decision, which they said has unnecessarily put global security at risk and raised the prospect of a unsafe confrontation with Iran.

While the assumed loss of this volume of Iranian oil is mostly priced in at this point, there is vast potential for volatility driven by all of the unanswered questions about the medium- term impacts later this year.

How will Shell react this time in an even more complex situation?

Provocations in regional hotspots like Syria and Yemen also will drive volatility, with the Israeli strike on Iran-linked targets in Syria yesterday and today's missile launches against the Saudi capital by Iran-aligned Houthi rebels in Yemen driving some of the recent price move. Until recently, the Iranians have not returned fire directly on Israel. If Iran chooses to resume its halted nuclear activities after its initial forbearance, this will sharply increase the risk of interstate conflict.

On Monday, U.S. crude reached $70 a barrel for the first time since November 2014.

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