Rexit has occurred! Last Tuesday, President Trump fired his Secretary of State Rex Tillerson. Besides impacting global geopolitics, the move also carried consequences for the existing global energy order.

The removal of Tillerson, often dubbed as the oil man, brings to fore, a number of serious questions. It would impact the crude markets over the coming months, most agree.

Rexit, however, was not completely out of blue. It was in making for months and the diverging positions of the President and his Secretary of State on key issues was evident to most. The President and the Secretary of State were simply not on the same page on a number of issues.

The exit of Tillerson and the induction of the rather ‘hawkish’ CIA chief Mike Pompeo as the new Secretary of State is making the crude markets nervous. Tillerson was often seen as a moderating voice in the Trump administration. On the other hand, Pompeo is not only a hawk, he has the ears of the president too.

Crude markets reacted to the announcement. The downward price spiral came to an abrupt halt as crude markets anticipated a potential increase in geopolitical tensions from the fallout of Rex Tillerson’s ouster. Although it didn’t last long, yet crude markets were seen rallying in the immediate aftermath of the announcement.

Analysts felt Tillerson’s departure could mean a hardening of Washington’s position on the nuclear deal with Tehran and on the issue of new sanctions against the Maduro regime in Caracas. Changes in Washington also appeared carrying implications for the ongoing Riyadh – Doha imbroglio and the timing of the Saudi Aramco IPO.

Earlier in the year, President Trump extended the ‘Iran waivers.’ But he didn’t seem very happy with that, insisting the deal would have to be either ‘fixed or nixed.’ From his initial days, he has been stressing that the Iran deal was a bad one and he wanted to get over it.

Realising the intricacies of the oil markets, Tillerson apparently stood in the way. Now with a hawk in the state department, the president could be closer to fulfilling his aspirations. Pompeo is expected to push for the US to exit the Iran nuclear deal. And that could make markets tighter.

Over the next couple of months, as another deadline for waiving sanctions is approaching, and with a new Iran hawk at the helm at the State Department, the Iran nuclear deal could begin to unravel, some are beginning to insist.

RBC Capital Markets’ Helima Croft believes Rex Tillerson’s exit could create “very big implications” for the global oil markets, underlining that Pompeo’s appointment will likely be the “nail in the coffin” for the Iran nuclear deal and spur additional sanctions on Venezuela.

“Rex Tillerson had argued for maintaining the Iran nuclear agreement. With Pompeo, a known hawk taking the top diplomat job, I could see Trump easily making the decision to not renew sanctions waivers on May 12, effectively ending US participation in the Iran nuclear deal,” Croft added.

Analysts at Societe Generale, in a Tuesday note that was published ahead of the Tillerson firing, said a refusal by the US to extend a waiver of Iran oil-export sanctions by May 12 would lift crude prices by around $10 a barrel. A lot would, however, depend on the reaction of Washington’s partners in the nuclear deal with Iran. Some may not be inclined to go Washington’s way – especially since a trade war between Europe and the US seems looming.

Venezuela is another factor getting into the overall equation. Washington Post reported that Pompeo’s past remarks indicate he could be inclined to take a tougher approach toward President Nicolas Maduro. Societe Generale analysts are of the view that additional oil-related sanctions on Venezuela could have a $2.50- to $5-a-barrel impact on crude prices.

Francisco Monaldi, of Rice University’s Baker Institute for Public Policy, told Platts that the Venezuelan oil output is already in a “death spiral” which could be worsened by additional US sanctions. Without new sanctions, Monaldi expects Venezuelan production to drop by 300,000 to 350,000 barrels per day (bpd) by the end of 2018, but if oil-sector sanctions are imposed, the decline could be as much as 400,000 bpd by the end of the year.

With the ouster of Tillerson, a number of ‘ifs’ seem to have cropped up almost instantly on the global energy horizon. The answers to those may not be easy. Yet one thing is certain – global energy geopolitics is in for some real fireworks.

Published in Dawn, March 18th, 2018