Wood Mackenzie

Press Releases: Energy

Wood Mackenzie Assesses Potential Implications for the Energy Industry of Further US and EU sanctions against Iran and/or closing of the Strait of Hormuz.

Press Note

Wood Mackenzie Assesses Potential Implications for the Energy Industry of Further US and EU sanctions against Iran and/or closing of the Strait of Hormuz.


EDINBURGH, 13th January 2012 - The evolving situation in Iran presents a host of uncertainties for the energy sector. How these uncertainties will ultimately play out will largely depend on the pace and nature of the political resolution.  Attempting to predict the outcome of this resolution is hazardous given the myriad of factors at play.  Instead, Wood Mackenzie’s analysis focuses on identifying the areas of the energy sector that may be affected and what fundamentals and factors should be watched carefully as the situation unfolds. 


Wood Mackenzie has made an initial assessment of potential implications for 2012 of the growing Iran-related tensions on oil, LNG and oil products markets under two cases: further US and EU sanctions against Iran and/or closing of the Strait of Hormuz. Wood Mackenzie’s base case forecast does not assume further sanctions nor a closing of the Strait.  We have carried out this assessment to inform our clients of the potential risks associated with these mounting uncertainties.


Further US and EU sanctions

Oil exports at risk
• Iran’s exported oil production of 2.5 mn b/d or about 3% of global production would be at risk to further sanctions. This does not mean that it will all come out of the market as supplies could be absorbed by other buyers that are not bound by the sanctions. The US and EU are trying to organize the sanctions in such a way as to minimize the impact on the oil market being aware of the potential risk to economic growth if prices rise. The start up of the sanctions will likely be delayed for months, as an example. • 99.5% of Iranian production is NOC held, so IOCs have minimal exposure to the sanctions.

 

Broader impact global oil market fundamentals
• Further sanctions pose a risk to oil prices and to the economies of the OECD especially. We would expect Brent to rise to the levels seen during the Libyan crisis in the spring of 2011 of $125 to $130 per barrel if fully enforced sanctions are put into place although the impact will vary according to the terms and timing.
• Similar to the case when Libya’s exports halted in spring 2011, the overall effect of sanctions will likely be to lift oil prices because of the adjustments that will need to be made in supply and the tighter OPEC spare capacity in the case that Saudi Arabia increases its oil production to make up for lost Iranian supplies to Japan and/or South Korea.


Closure of Strait of Hormuz 

 

Oil & Gas exports at risk
• Over 17 mn b/d of oil supplies would be impacted by the closure including volumes from Saudi Arabia, Iraq, Iran, Bahrain, UAE, Qatar and Kuwait.
• The top five buyers of Middle Eastern Crude include Japan, China, South Korea, India and the United States
• Over 113 bcm or 1/3 of current global LNG trade flows would be impacted by the closure including production from Qatar and the UAE.  A proportion of production for five majors would be affected.
• The top five buyers of Middle Eastern LNG include: China, Japan, the UK, Italy and India.
• Alternative evacuation routes for oil exports are limited to Iraq (Strategic pipeline), Saudi Arabia (East West Petroline) and UAE: Abu Dhabi ( Fujairah pipeline - Expected start-up: Q1/2 2012)

 

Broader impact global oil market fundamentals
• If the Strait was closed, it would cause the oil price to spike to around $150 - $175 per barrel. The spike would not be sustained as it not likely the Strait would remain closed for a significant period of time.
• The threat of closing the Strait, made by Iran, as part of its response to US and EU pressure on it, is already affecting the oil price by putting in a political risk premium.  This could increase if threats escalate.

 

Potential impact on refined product markets
• The Middle East is a net importer of gasoline and an exporter of LPG, naphtha and jet fuel. The loss of Middle East gasoline import demand would appear bearish for gasoline crack spreads, however, lower supply globally due to less crude supply could actually result in the market getting tighter.
• There will be strong competition for most products due to lower refinery output.  Those regions that have the strongest economies and therefore strongest demand growth would be likely to pay higher premiums to ensure product supply. 


At present, the impact on the energy sector from the evolving situation in Iran presents is minimal apart from the current political risk premium on oil price. That said, this could change quickly if the political situation deteriorates. Our intention is to watch the situation and the markets closely and provide ongoing and informed energy insights to our clients as events unfold.