Global petchems brace for impact from escalating US-Iran tensions

LONDON (ICIS)–Petrochemicals players globally are braced for higher oil costs after the killing of the top Iranian military official by the US sent crude prices spiking on Friday.

Prices surged by almost $3/bbl in early trading on news of the US drone strike, which resulted in the death of Iranian commander Qasem Soleimani and several other military personnel at Baghdad Airport, Iraq, early on Friday morning.

The main fear at present is the potential for supply disruption, according to ICIS senior analyst Ajay Parmar.

“The primary concern is over oil supply from the region,” he said. “Iran has previously threatened to cut off access to the Strait of Hormuz, where over 20% of global petroleum liquids pass through. Reduced access to the strait will remove significant quantities of crude oil from world markets.”

“Our feeling is that it will delay the return of Iranian material to our markets,” added a methanol market source.

An attack on a senior Iranian official could be taken as an act of war, with a statement by the country’s Supreme Leader Ayatollah Khamenei denouncing the killing and vowing revenge, fuelling fears that the two powers could be shifting to a more overtly hostile footing.

Crude futures had also been firming as a result of a perceived breakthrough in US-China trade negotiations, with expectations for the first phase for a trade deal to be signed later this month, as well as moves by OPEC and partner countries to tighten global supply further.

The incident represents the latest geopolitical shock to global crude markets after drone strikes on Saudi Aramco’s oilfield and refining facilities in late 2019, thought to have been carried out by Iran as relations between the two oil powers continued to decline.

That incident briefly took a significant chunk of global crude capacity offline and sent crude prices soaring, but Saudi officials moved to calm market jitters by promising that capacity would be back online within a few weeks.

The assurances pushed prices back to where they had been prior to the attack, leading analysts to note that a long stretch of oversupply in crude markets had left investors slower to respond to or price in geopolitical risk.

Between the Aramco strikes, attacks on several tankers in the Strait of Hormuz near Oman, and rising tensions across the Middle East, oil markets have been buffeted with political volatility that has largely failed to influence pricing.

Oil demand was slow in late 2018 through most of 2019 as a result of weak economic growth at a time when supply continued to rise dramatically despite OPEC production cuts due in large part to the US’ growth as an oil power, but this could result in players being caught off guard if anything occurs to significantly tighten markets.

The incident also represents the latest stage in Iran’s isolation on the global stage. A deal with western powers on the country’s nuclear programme brokered by Iranian President Hassan Rouhani had led to expectations that the country would open up to investment in an opportunity that analysts at the time likened to post-Glasnost Russia.

However, it remained difficult for companies with a significant US presence to move into the country, and memoranda of understanding signed with firms including BASF and Total failed to move forward, with the process chilled further by the election of Donald Trump as US President, a vociferous opponent to the nuclear deal.

The US’ decision to break away from the treaty and the threat of sanctions on companies and countries that continued to do business with Iran meant that investment in the country failed to materialise and drastically reduced cashflows from oil sales.

Rouhani, who had looked to liberalise Iran’s economy, spent a lot of his political capital on the nuclear deal, and its failure led to a shift in power back to the more hardline Khamenei and the Iranian Revolutionary Guard, and for the country’s focus to move inward.

Focus article by Tom Brown

Additional reporting by Katherine Sale, Ajay Parmar, Nurluqman Suratman and Vicky Ellis

Front page image: Iraqi Prime Minister Press Office photo shows a burning vehicle at the Baghdad International Airport following the attack on Qasem Soleimani. Source – HO/AP/Shutterstock

Clarification: recasts analyst comment in fourth paragraph