Iran: checkmate or stalemate

Published at 16:25 26 Sep 2012 by . Last edited 11:17 22 Aug 2019.

The tense confrontation continues between Iran and Western Powers over the Iranian refusal to comply with UN Security Council resolutions and cease uranium enrichment. In response, US and EU economic sanctions implemented from 1 July have targeted Iranian oil exports. Statements and actions on all sides over the last week have been widely interpreted as signs we may be moving closer to a decisive military endgame. Our view Is that the position largely remains one of stalemate and military action is unlikely in the short-term.

Despite the sanctions, various reports suggest that Iran has begun increasing exports of crude oil using a range of strategies including routing shipments via the small Malaysian port of Lauban, selling through a private consortium and offering tanker insurance via the National Iranian Tanker Company (NITC). The concentration of Iran's buyers has increased. India and China remain the largest buyers and imports by Turkey, Japan and South Korea all appear to be increasing.

This week, the US Treasury officially linked the National Iranian Oil Company (NIOC) to the Iranian Revolutionary Guard Corps, allowing new sanctions to be applied to foreign banks dealing with NIOC. This may restrict some of the export routes that Iran has been using. The hardening of sanctions has long-term implications for the oil sector, threatening the investment required to maintain crude output levels in the context of high decline rates for Iranian fields.

President Obama took a tough line in his address to the UN General Assembly on Tuesday, signalling that the time for a diplomatic resolution is not unlimited. Naturally, the prospect of military strikes on Iran's nuclear facilities, whether led by the US or unilateral strikes by Israel, is being widely discussed by the market. Any attack would likely lead to Iranian retaliation, including harassment of shipping in the Strait of Hormuz. Our view is that oil markets are, correctly, not pricing in a military confrontation yet and should Iran continue to skirt sanctions and raise export levels, this may even dampen prices in Q4. However, should the situation move towards conflict, the upside to oil prices would be significant. ​

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