Iran economy faces deeper damage as US ups pressure

The market is watching to see how nimble Iran will be in skirting US oil sanctions and how much damage oil export restrictions will have on Tehran’s battered economy.
Sunday 12/05/2019
Beating the air. Iranian flags flutter during an inauguration ceremony for new equipment and infrastructure at the Shahid Beheshti Port in the south-eastern coastal city of Chabahar, February 25. (AFP)
Beating the air. Iranian flags flutter during an inauguration ceremony for new equipment and infrastructure at the Shahid Beheshti Port in the south-eastern coastal city of Chabahar, February 25. (AFP)

Increasing trade tensions between Washington and Beijing and the Trump administration beefing up its military presence in the Arabian Gulf to counter perceived Iranian aggression have created price uncertainty in the international oil market.

Tehran is stoking price volatility as well by threatening to partially pull out of its 2015 nuclear treaty with European allies and start enriching uranium in 60 days if they don’t force Washington to back away from sanctions that are crippling Iranian oil and banking sectors.

The market is watching to see how nimble Iran will be in skirting US oil sanctions and how much damage oil export restrictions will have on Tehran’s battered economy, which is facing a deepening recession. Approximately half — an estimated 500,000 barrels per day — of Iranian crude oil exports could disappear from the market, following the Trump administration’s decision to not renew waivers to eight Iranian crude buyers.

Oil prices have surged since the beginning of 2019, with prices for UK benchmark crude Brent and US benchmark West Texas Intermediate rising 30% to 40%, respectively, but economic and geopolitical risk factors have created an unpredictable market.

The oil market is facing price volatility over fears that a collapse in US-Chinese trade negotiations could wreak havoc on global economic growth, further softening weak oil demand. Adding to the uncertainty is not knowing how much crude flow will be affected by American oil sanctions on OPEC members Iran and Venezuela while a third cartel member, Libya, could suffer serious oil disruptions if its civil conflict worsens.

The Trump administration announced on May 5 that it was sending an aircraft carrier strike group and a bomber task force to the Gulf region to counter “a credible threat by Iranian regime forces,” adding another risk element to the market considerations.

The oil market took notice of Tehran’s warning April 22 that it was prepared to close the Strait of Hormuz, the strategic waterway that allows for as much as one-fifth of the world’s oil needs to be transported from the Gulf.

Saudi Arabia and the United Arab Emirates agreed to work with the United States to prevent an oil price spike by providing oil to replace the expected drop in Iranian crude supplies. Riyadh indicated it would take a measured approach towards increasing its crude output and the kingdom is unlikely to ramp up its oil production in May.

However, US Energy Secretary Rick Perry said on May 7 that “our allies, Saudi Arabia for instance, are increasing their production to meet these needs relative to the Iran sanctions.”

The US government said Tehran typically has earned $50 billion a year from its oil exports. Since the US embargo on Iranian crude sales went into effect in November with the temporary waivers attached, Tehran reportedly has lost more than $10 billion in oil revenue.

Iran’s economy faces deeper damage with those exemptions revoked. The Trump administration notched up its pressure on Iran’s economy May 8, announcing sanctions on Tehran’s metals sector.

As part of his executive order, US President Donald Trump emphasised that it is “the policy of the United States to deny the Iranian government revenue, including revenue derived from the export of products from Iran’s iron, steel, aluminium and copper sectors, that may be used to provide funding and support for the proliferation of weapons of mass destruction, terrorist groups and networks, campaigns of regional aggression and military expansion.”

Trump said revenues from Iran’s industrial metals exports comprise 10% of Tehran’s export economy. Iran is said to have earned $5.5 billion over the last year from its export of products using the four industrial metals now under US sanctions.

The International Monetary Fund (IMF) predicted Tehran’s economy, which contracted 3.9% in 2018, would shrink 6% this year and said inflation could reach record levels.

“Clearly the reimposition of sanctions and the removal of the waivers will have additional negative impact on the Iranian economy both in terms of growth and in terms of inflation, where inflation could reach 40% or more this year,” said Jihad Azour, IMF director of Middle East and Central Asia.  The Statistical Centre of Iran (SCI) said the country’s monthly inflation rate recently hit 51.4%.

Iran’s currency freefall began last year ahead of the Trump administration’s announcement in May 2018 to pull out of the 2015 nuclear treaty. The sanctions renewal spurred a greater slide in the rial, which has lost nearly 60% of its value, adding to the inflation crisis and hurting the nation’s foreign trade.

While the official rate of the Iranian rial is 42,000 rials to the US dollar, the black market exchange rate sat at 143,000 rials to the US dollar at the end of April. The cost of food staples soared in the last year, with prices for red meat and poultry jumping 57%, cheese and eggs 37% and vegetables by 47%, SCI said.

Rumours of fuel rationing to go into effect May 2 prompted long queues at petrol stations in Tehran and other cities, forcing Iranian Oil Minister Bijan Namdar Zanganeh to call reports of the rationing decree “lies.” The Interior Ministry acknowledged that the issue of petrol rationing is under review but the extent and timing have yet to be determined.

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