By Arshad Mohammed

 

WASHINGTON (Reuters) - Reports of the Iran nuclear deal's imminent demise might just be premature.

 

President Donald Trump will decide by May 12 whether

 

to restore U.S. economic sanctions on Tehran, which would be a severe blow to the 2015 pact between Iran and six major powers.

 

Under the deal, Tehran agreed to curb its nuclear program in return for relief from economic sanctions. Trump's predecessor, Barack Obama, struck the pact to try to keep Iran from building a nuclear weapon but Trump believes it has "disastrous flaws."

 

Even if Trump rejects a possible remedy being worked out by U.S. and European officials and decides to bring back sanctions, the key U.S. sanctions targeting Iran's oil sales will not immediately resume.

As a result, oil markets and companies may have some time to adjust to the prospect of fresh U.S. sanctions, and diplomats could keep trying to avert them.

There are at least two avenues potentially offering more time for talks after May 12, difficult as that may seem given that Iran has strongly warned against reviving sanctions.

The agreement has a dispute resolution clause that provides at least 35 days to consider a claim that any party has violated its terms. That can be extended if all parties agree.

And if Trump restores the core U.S. sanctions, under U.S. law he must wait at least 180 days before imposing their most draconian consequence: targeting banks of nations that fail to cut significantly their purchases of Iranian oil.

Iran has ruled out renegotiating the accord and threatened to retaliate, though it has not said exactly how, if Washington pulls out.

"Iran has several options if the United States leaves the nuclear deal. Tehran's reaction to America's withdrawal of the deal will be unpleasant," Iranian Foreign Minister Mohammad Javad Zarif said Thursday.

OIL MARKET TENTERHOOKS

Oil markets are watching the issue closely.

"This is a market that is on tenterhooks in terms of monitoring headlines out of the Middle East," said John Kilduff, a partner at Again Capital Management, a hedge fund in New York.

While the physical impact on oil supplies may be delayed or muted if the deal unravels, futures are expected to react sharply to a return of Iran sanctions.

Oil prices already reflect a $1 to $3 premium on the assumption that the United States may pull out of the deal and that additional sanctions may be put in place that will harm Iran’s ability to sell oil into the market.

If the United States opts to remain in the deal by May 12, oil prices would drop to eliminate this premium. On the other hand, if it pulls out and Iranian exports are cut, prices could climb as much as $5 a barrel.

If Trump declares that he is reviving sanctions, it is unclear whether European allies would still want to talk or whether the deal's other parties, including Iran, would accept any compromise before the sanctions actually kick in.

"It is technically feasible by virtue of having this window ... but (I) struggle to see how it would work in reality," said a European diplomat of talking beyond May 12.

The leaders of France and Germany visit Washington next week in the hopes of persuading Trump to bless an emerging fix being worked out among British, French, German and U.S. diplomats that might preserve the agreement.

DIPLOMATIC FALLOUT

The odds of the deal collapsing appear to have risen since Trump recently appointed hawkish National Security Adviser John Bolton and nominated Mike Pompeo to become secretary of state.

The end of the pact would raise tensions in the Middle East where rivals Saudi Arabia and Iran are vying for supremacy.

It could also make it harder for Trump to get North Korea to curb its nuclear program, given that Pyongyang might conclude Washington cannot be trusted to keep its word.

Trump sees three defects in the deal: a failure to address Iran's ballistic missile program; the terms under which international inspectors can visit suspect Iranian nuclear sites; and "sunset" clauses under which limits on the Iranian nuclear program start to expire after 10 years.

Diplomats have cited progress on ballistic missiles and on inspections but the sunsets issue remained unresolved.

Pompeo, currently CIA director, and Treasury Secretary Steven Mnuchin - have hinted at the possibility of continuing talks, either about a fix or about a whole new deal.

"He can have it both ways by declining to extend the waivers in mid-May, and then using the six-month window to try to prod the Europeans to do more ... before sanctions actually kick back in," said a former U.S. official.

"Classic Trump - lots of sound and fury, with the door still cracked open," he said, citing fears this "would only prolong the death by a thousand cuts that is the (deal's) likely fate."

(Reporting By Arshad Mohammed; Additional reporting by Tim Gardner in Washington, Parisa Hafezi in Ankara, John Irish in Paris and Jessica Resnick-Ault in New York; Editing by Yara Bayoumy and Alistair Bell)