Iran sanctions to fuel oil spike but may not hit $150/bbl – Moody’s

22 May 2012 06:46  [Source: ICIS news]

SINGAPORE (ICIS)--Oil prices are expected to increase further with a fresh wave of international sanctions slapped on Iran over the country’s suspected development of nuclear weapons, Moody’s Investor Service said on Tuesday.

But the possibility of crude prices hitting $150/bbl is “low” if Iran were to block the Strait of Hormuz – an important export route for oil and gas producers – as this is expected to be short-lived, the ratings firm said in a statement.

At midday, US crude was trading at close to $93/bbl, while Brent crude was quoted at around $109/bbl.

While higher oil prices are “credit-positive” for international oil companies (IOCs), other corporates such as airlines, oil refining, as well as automotive and retail sectors, are expected to take hits, Moody’s said.

"As most IOCs have no or very limited exposure to Iran in terms of their overall production, higher prices triggered by a supply squeeze from the sanctions on Iran would benefit their oil exploration and production (upstream) operations considerably," said Moody’s managing director for EMEA (Europe, Middle East and Africa) corporates.

The expected gains could more than make up for any adverse effects on IOCs' downstream businesses, which typically account for a much smaller portion of their total operating profits and cash flows, the ratings firm said.

"However, an oil shock resulting from a US/EU economic confrontation with Iran would ripple throughout other industries around the world -- and could also derail the global recovery," said Steven Wood, Moody’s managing director for US corporates.

Moody's defines an "oil shock" as a prolonged period when oil prices stay at $150/bbl.

Under such circumstances, European auto makers would be hardest hit, according to Moody’s, while airlines are expected to incur operating losses from sustained higher costs of jet fuel, with the consequent air fare increases likely to hurt demand.

Retailers, restaurants and other industries that depend on discretionary spending are also expected to suffer if fuel prices were to surge, the ratings firm said.

"The magnitude of oil price increases linked to the EU and US sanctions, which take effect from June, will depend in part on how strictly they are adhered to," said David Staples, managing director for Gulf Cooperation Council (GCC) corporates.

Moody’s said that it is unclear at this stage to what degree Iran's top customers will reduce their imports in order to avoid the sanctions.

“Other major oil-producing countries have capacity to cover the loss of supply from Iran, although it will take time for this to become operational,” the US-based ratings firm said.

By: Pearl Bantillo
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