Risk level: Orange - High

RED: Severe (+/- 4%) ORANGE: High (+/- 2%)  YELLOW: Elevated (+/- 1%)  BLUE: Guarded (+/- ½%)

The risk is real, but the uncertain factor regarding President Trump's decision on the Iranian nuclear is for whom. The price for Brent crude oil was testing the $77 per barrel mark by early Monday and WTI had already topped the psychological threshold of $70 per barrel before the start of trading in New York. We were on the mark last week with our Blue alert, with crude oil prices moving less than a full percentage point. With Trump surrounding himself with advisors with an adversarial view of Tehran, we see oil prices moving sharply higher for most of the week.

"The U.S. exit from the JCPOA will show that the Americans are isolated and are no longer trustworthy for international interactions," Iranian Foreign Minister Javad Zarif said on Monday.

Trump has until May 12 to decide on extending sanctions waivers for Iran. Calling the Joint Comprehensive Plan of Action a shoddy deal, his decision against waivers would take the United States out of the agreement that limits Iranian nuclear ambitions. Iran is exporting around 1 million barrels per day, down from their earlier peak of around 2.5 million bpd, but those extra barrels are important in a tightened market. OPEC said commercial oil stocks in the advanced economies of the OECD are down from their peak of 3.12 billion barrels in July 2016, when crude oil prices averaged $44.95 per barrel, to 2.83 billion barrels in March 2018, when crude oil prices averaged $66.10 per barrel. By OPEC's metrics, that corresponds to a decline of about 300 million barrels, which indicates what Iranian oil there is flowing in the international market matters.

Collectively, even if Iranian oil clients decided to look elsewhere, it would be hard to find as Saudi Arabia is unlikely to move unless oil prices start to test the $100 per barrel market. But non-U.S. parties to the JCPOA have shown willingness to maintain, at the very least, an open-door policy with Iran. European leaders met with Iranian Deputy Foreign Minister Hossein Jaberi Ansari last week. On Monday, British Foreign Secretary Boris Johnson met in Washington with his U.S. counterpart, Mike Pompeo. Writing in The New York Times, Johnson said it would be a mistake to jeopardize the deal.

"Only Iran would gain from abandoning the restrictions on its nuclear program," he wrote.

Trump, meanwhile, has already expressed concern about higher oil prices, using has preferred venue for communicating policy – Twitter – to complain that OPEC is "at it again" by pushing oil prices to "very high" levels.  When he wrote that on April 20, Brent was at $74.62. It was above $76 per barrel by mid-day Monday. Higher oil prices mean higher gas prices for American consumers and, guessing by his reaction, the OPEC production agreement is offsetting some of the gains from U.S. tax reforms.

Gholamreza Manouchehri, the deputy head of the National Iranian Oil Co., said nothing can stop Iran. The IMF said Iranian economic recovery has in part been led by the non-oil sector and real GDP growth is expected to be in the 4 percent range through 2019. That assessment was made in March. Manouchehri said Monday that, under sanctions pressure for decades, Iran can figure out how to preserve its market share.

So what about the United States? If Boris Johnson is right, who stands to lose if it's Iran that gains the upper hand? There are already suggestions of a recession emerging for the world's leading economy at some point in the near future. A 2016 report from Christiane Baumeister of the University of Notre Dame and Lutz Kilian of the University of Michigan found "little net effect" on the U.S. economy from that era's drop in crude oil prices. So the reverse must be true – "little net effect" from a spike in crude oil prices. But if the Iranian sanctions move is read through the same lens as the OPEC oil embargo, the U.S. recession in the 1970s should serve as a reminder of the stakes at play in the economics behind the price of oil.  With little spare capacity available, with manufacturing sectors under pressure from U.S. trade policies and with inflation already under the microscope, backing out of the deal with Iran could have a blowback effect for the U.S. economy.

We're issuing an Orange alert, expecting crude oil prices to move by as much 2 percent for the week.