“In response to tougher sanctions, including a boycott of Iranian oil exports by the European Union, Iran has threatened retaliation, notably in the form of a blockade of the Strait of Hormuz, a conduit for the flow of oil and gas out of the Gulf,” S&P said in its latest report.So far, these threats have been verbal, but analysts are not ruling out the possibility that the current exchanges of rhetoric could spark disruptions to trade flowing through the Strait, or even in an extreme scenario, military confrontation.
“At this time, we think the current developments in relation to Iran are captured in our ratings on countries and corporate issuers in the region and so we do not expect any immediate actions,” it said, adding nevertheless, political pressures in the Middle East are acute, and any sudden deterioration in the situation could lead to reassess this view.
In the absence of a diplomatic solution, Iran could respond in some way to the latest wave of sanctions and international pressure, most likely – and past behavior suggests this – through low-level provocation, according to the rating agency.
For example, it said, Iranian authorities could slow shipping through the Strait of Hormuz and disrupt the timely supply of oil from the Gulf by imposing tanker inspections, boarding merchant ships, and otherwise obstructing shipping routes in its territorial waters.
Such low-scale provocation and simmering tension would in S&P’s view keep oil prices at their currently high level because markets would increasingly view the spectre of armed conflict as a real, if remote, possibility.
Although there was a very low likelihood of a severe disruption of oil supplies through the Strait, it said a potential oil shock would pose a worrying scenario.
“Such a disruption of oil supply, should it continue over a period of several months, would in our view lead to a spike in oil prices, which would fuel inflation and upset a fragile economic recovery in both developed and emerging markets,” said S&P chief economist for Europe Jean-Michel Six.
He said the ensuing uncertainty would also likely unsettle financial markets, leading to higher bond yields and once again add to refinancing difficulties for sovereigns on the periphery of the eurozone.
For oil-producing sovereigns of the GCC – Saudi Arabia, the UAE, Qatar, Kuwait, Oman, and to a lesser extent, Bahrain– higher oil prices would actually be beneficial, S&P credit analyst Elliot Hentov said.
“As oil exporters, they would receive more foreign earnings that they could either use to stimulate demand or improve their government’s balance sheets,” he said.
Cautioning that while it’s uncertain how rapidly or how high oil prices would rise in such a scenario, S&P said its economists envisaged that a price of $ 150 per barrel was “not absurd”, and would most likely push the world economies into a recession.