US, Iran Tensions shake global economy

The current tensions between the US and Iran in the gulf has almost jolted the world economic cantours as surge in the oil prices have badly affected the prices of all the commodities in almost every country of the world; however, a few countries with surplus oil reserves as exception where daily commodities prices have sustained the against the worse shocks of this tension.

This tension has also fluctuated oil prices 4 percent, as the market reacts to Trump tightening the Iran sanctions, and crises in Venezuela, Libya and the Gulf. However, the International Energy Agency has announced a slowdown in oil demand which will help keep prices stable around $70/barrel to compensate for supply disruptions (see graph). OPEC has kept production at 30.2 million barrels per day (mbd) as it waits to see the full effects of the Iran sanctions.

The impacts have been severe. In May of 2018 Iranian crude and condensate exports reached 3.5 mbd. In April oil shipments hit a five-year low at just under 1 mbd. OPEC+ members, notably Russia and Saudi Arabia, plan to meet this weekend in Jeddah to discuss future output levels. While both are eyeing Iran’s market share, they are on the opposing sides of the conflict around Iran.
The Strait of Hormuz, only 21 miles wide, sees roughly 18.5 million barrels of oil flow in and out each day. Some 20% of the world’s gas exits via the strait as well. It is no surprise then that the U.S. Energy Information Administration calls Hormuz ‘the most important oil transit chokepoint’ in the world. More than 90% of Saudi oil exports travel through the strait in addition to supplies from Kuwait, Qatar, Bahrain, Iran, Iraq, and the UAE. A conflict in the Strait of Hormuz would be catastrophic to global oil markets and bring with it serious consequences to the global economy.

Factually, Iran and the United States have no formal diplomatic relations since 1980. Pakistan serves as Iran’s protecting power in the United States, while Switzerland serves as America’s protecting power in Iran. There have been a handful of attempts and near-attempts from both sides at striking a dialogue in both bilateral and multilateral forums on a number of issues.

During Iran, Iraq war, the United States increased sanctions against Iran. In 1984, sanctions were approved to prohibit weapon sales and all US assistance to Iran. The Iran and Libya Sanctions Act (ILSA) was signed on 5 August 1996. Despite sanctions Iran is ranked 94th in the world by GDP with per capita $ 5,289 income per annum. The economy of Iran is a mixed and transition economy with a large public sector. It is the world’s eighteenth largest by purchasing power parity (PPP). Some 60% of the economy is centrally planned.

Even Iranian car industry is much bigger than you might think, producing a vast amount of automobiles every year. According to figures from the International Organization of Motor Vehicle Manufacturers (OICA), Iran was the 12th biggest car market on the planet in 2017, with sales in the region of 1.5 million cars. That number of cars sold represented an 18% growth in sales, which made Iran the fourth fastest growing nation in the market, behind Brazil, Portugal and Russia.

There are two major players in the Iranian car market, Iran Khodro and Saipa, who produce their own models, but also manufacture more well-known brands thanks to deals with bigger companies. PSA, which makes Peugeot and Citroen, have deals with both Iran Khodro and Saipa, whilst Renault have a piece of the market and Hyundai have a production deal with private firm Kerman Motor.
So, whilst you are unlikely to see many cars that are badged up as Iranian models – such as Iran Khodro’s Samand – there are plenty of more recognisable brands that produce their cars in Iran. Peugeot is the most popular brand in the country, with a market share of 34% in 2017, according to Marklines.

The Iran nuclear deal framework was a preliminary framework agreement reached in 2015 between the Islamic Republic of Iran and a group of world powers: the P5+1 (the permanent members of the United Nations Security Council the United States, the United Kingdom, Russia, France, and China plus Germany) and the European.

However, in this May, the US President Donald announced the US would violate the Iran nuclear agreement, nearly three years after the Joint Comprehensive Plan of Action (JCPOA) was struck.
In exiting the JCPOA, Trump broke from US allies in Europe and has potentially triggered a new crisis in the Gulf. We’re closing down the live blog, but more news and analysis is coming this evening.

Since then oil prices in the international markets are on the rise and playing havoc with the prices of other commodities in the world markets. Now the global oil markets are accustomed to factoring geopolitical uncertainty into oil prices, this kind of geopolitical fallout hasn’t been seen for a number of years. The world’s largest oil exporter, that still along with its OPEC+ partners, plays the role of global oil markets swing producer, is seeing an escalation of attacks on its oil export infrastructure and shipping.

Meanwhile, the US military, amid an increasingly tense tit for tat exchange of words between Washington and Tehran, said it was braced for possibly imminent threats to US forces in Iraq from Iran-backed forces. Attacks on the pumping stations more than 200 miles west of Riyadh and attack on four tankers off the UAE have raised concerns that the US and Iran might be inching toward military conflict. However, Trump told media that he did not want a war with Iran.

All of this, of course, isn’t being lost on global oil markets which ticked up by more than 1 percent. Global oil benchmark Brent crude futures ended the day’s session at $72.62/barrel, up 1.18 percent, while US oil benchmark West Texas Intermediate (WTI) crude futures were up 1.37 percent, at $62.87/barrel, near its highest level in two weeks. Global oil traders aren’t the only ones closely monitoring increased tensions in the Middle East, global ship insurers also considering their next course of action. London maritime ship insurers met to consider whether or not to increase shipping insurance rates for tankers in the Arabian Gulf.

However, thus far they have failed to reach consensus. The Joint War Committee, which includes Lloyd’s Market Association (LMA) members and representatives from other insurance providers, discussed the matter further, said the LMA’s Head of Marine Underwriting Neil Roberts. According to reports, the group doesn’t have enough information yet to make a decision over rate possible increases. At the moment there are not many facts or verifiable information, Roberts said. There is no decision yet on whether to change the listed areas of enhanced risk.

There are a number of options, which include no change. He added that any changes would take seven days to come into effect. Ships going into the Gulf already have to inform underwriters; the question is whether vessels within the Persian Gulf and operating there are additionally exposed, he said. The last time The Joint War Committee updated the list of high-risk areas was June 2018.

Some are already anticipating an increase in shipping rates, including Asian oil refiners which rely heavily on Middle Eastern crude imports. Asia derives around 70 percent of its crude oil from the Middle East, while disruptions in oil production or shipping routes can severely affect Asian economies, including China and Japan, the world’s second and third largest economies, respectively.

Ashok Sharma, managing director of shipbroker BRS Baxi in Singapore, says that there seems to be no increase in [insurance premiums] as of yet, while he warned that if security in the Gulf region deteriorated, then insurers may be left with no choice but to increase marine insurance premiums.

Now there are speculations that output cuts by Opec and its allies as well as tensions between Saudi Arabia and Iran following attacks on the kingdom’s oil installations and oil tankers is expected to support oil prices. Oil prices trended lower last week due to concerns pertaining to growth following the escalation of tensions between China and the US on trade related issues.
International benchmark Brent was trading at $68.69 per barrel. Brent saw a decline of 4.5 per cent last week, the biggest weekly drop of the year pressured by rising inventories and worries about the global economy. West Texas Intermediate was at $58.63 per barrel.

Middle East tensions and the Opec+ group of producers maintaining and potentially extending current production cuts have supported the flat price of oil. This despite concerns about slowing demand growth as the negative impact on the global economy of the US-China trade war continues to spread.

Newsletter SignUp

About Hadi Bandial 15 Articles
Writer is the CEO of Mélange IT Solutions & The Asian Telegraph, an expert on Political Economy, & Director of Bandial Group.