Iran Sanctions Affecting Global Markets?

After US President Donald Trump announced the US withdrawal of the nuclear agreement with Iran, officially known as the Joint Global Action Plan (JCPOA), on May 8, 2019, Washington reintroduced several sanctions packages against Tehran. Restrictive measures were taken against Iranian oil exports and Washington said that if any state wanted to continue doing business with Tehran, effectively circumventing the sanctions, it would face far more painful consequences than withdrawing from the Iranian market.

Meanwhile, eight oil-importing countries were exempted from these sanctions for a period of six months – China, India, Turkey, Japan, South Korea, Taiwan, Italy and Greece (the last three have already stopped buying Iranian oil) to supposedly ensure a well-supplied oil market.

On April 22, US President Donald Trump announced his decision not to reissue the exceptions for these eight countries to import Iranian oil after they expired on May 2. It is noteworthy that Washington’s goal is to cut Iran’s oil exports to zero for Tehran to lose its main source of budget revenue. At the same time, Iran remains one of the biggest players in the global oil market and several countries depend on Iranian oil.

Taking these facts into account, how could the ending of sanctions waivers for Iranian oil importers affect the global oil market? Could this aggressive step by Washington have major consequences for the world economy?

” Maximum pressure on the Iranian regime means maximum pressure. That’s why the U.S. will not issue any exceptions to Iranian oil importers. The global oil market remains well-supplied. We’re confident it will remain stable as jurisdictions transition away from Iranian crude, ” US Secretary of State Mike Pompeo wrote on his Twitter account.

Large-Scale Repercussions

According to Brian Hook, a representative of the US State Department for Iran, since the reintroduction of US sanctions against Tehran, more than 20 countries have already reduced their oil trade to that country. In addition, he said the US would help Iraq increase its oil production so that Turkey and other importing countries remain well-supplied after Washington ends sanctions waivers. Donald Trump expressed his confidence that Saudi Arabia and other OPEC member countries will produce enough oil to offset the decline in the supply of Iranian oil in the global market.

However, the situation may not be as simple as it may seem. Amid reports of the end of the exemptions, oil prices have peaked since October 2018. Taking into account the US-sponsored turmoil in Venezuela and Libya – two of the top oil exporters – oil prices could continue to rise. This fact undoubtedly raises concerns for major oil importers, including China, India and Turkey. Chinese Foreign Ministry spokesman Geng Shuang stressed that “this relevant US move will intensify the turmoil in the Middle East and turmoil in the international energy market.”

Turkish Foreign Minister Mevlut Cavusoglu criticized the US decision to repeal exemptions from sanctions on Iranian oil, stating that such an “unacceptable” move would affect regional peace and stability. According to Cavusoglu, Turkey rejects sanctions and unilateral restrictions on its neighbours. Chief financial analyst of BCS Premier Anton Pokatovich said that the extent of the damage caused by this US decision against the Iranian oil sector will be determined by the willingness of other countries not to submit to Washington pressure.

“According to our estimates, only China and, to some extent, India may have this provision. However, even assuming that these two buyers of Iranian oil succeed in delaying the withdrawal of Iranian supplies, other exporters would be obliged to change the structure of its oil imports,” the analyst explained, noting that the price of oil could reach $80 per barrel.

As for Iran itself, Iranian supreme leader Ayatollah Ali Khamenei has stated that the country will continue to sell oil despite the US attempts to block its trade. ” US’s efforts to boycott the sale of Iran’s oil won’t get them anywhere. We will export our oil as much as we need and we intend. They should know that their hostile measure won’t be left without a response. The Iranian nation does not sit idle in the face of animosities,” wrote the supreme Iranian leader on Twitter.

Tehran’s response to the new US restrictive measures could be really tough: Iran is able to close the Strait of Hormuz, responsible for the transit of at least 20% of the world’s oil. Through this strait, not only does Iranian oil pass but also from Kuwait, Bahrain, Qatar, the United Arab Emirates and Saudi Arabia – all major oil exporters. This would lead to a drastic increase in oil prices, as the consequences of blocking this sea route and would be catastrophic for the world oil market.

This is a significant risk of pressure against the global economy and demand for oil and growth in emerging markets. These emerging markets, such as Pakistan and India, are also the largest oil consumers in the world. The exaggerated rise in oil prices could exacerbate negative trends in developing markets and the weakening of the currencies of these countries.

In the context of the pressure on the global economy (rising interest rates and trade wars), the situation could be considered even more serious. According to forecasts by the International Monetary Fund (IMF), the world economy will slow this year in 70% of countries. As for the oil market, any rise in oil prices will spill over into other commodities, leading to inflationary pressure, trade imbalances and possibly a global recession.

DISCLAIMER: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy and position of Regional Rapport.