The tensions in Iran and the impact it may have on the UK’s Energy

If you follow the news, you’re likely to have heard about the crisis in the Gulf following a series of incidents. These events have caused significant tension between Iran and Western countries, and many fear that we could be on the brink of war.

Timeline of events

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A lot of the issues can be traced back to the US withdrawing from the Iran nuclear deal a year ago, with President Trump stating that it was not strong enough.

The P5+1 deal, which was agreed in 2015, is a long-term deal for Iran’s nuclear programme with a number of world powers, including the US, UK, France, Germany, China and Russia.

This came after years of tension over Iran’s alleged efforts to develop a nuclear weapon, with Iran insisting that the programme was entirely peaceful. The accord saw Iran agree to limit its sensitive nuclear activities and allow international inspectors in, in order to remove the economic sanctions placed on the country. 

In addition to the US pulling out of this agreement they also placed sanctions on Iranian crude oil experts, giving waivers to select countries in order to limit the impact, but this is where tensions began to mount.

A number of events then unfurled, adding to this: 

  • There were two tankers hit with explosions, which were credited to terrorists in Yemen.

  • In the weeks following, there were another two tankers explosions which the US blamed Iran for.

  • Iran then shot down a US drone claiming it was flying in its airspace, the US retaliated with cyber-attacks in response.

  • Then the British Royal Marines helped to seize an Iranian tanker, Grace 1, off Gibraltar, due to evidence that it was carrying oil to Syria, breaching EU sanctions. Iran called this act “piracy” and threatened to seize a British oil tanker if their ship was not released immediately.

  • Iran tried to seize two British-flagged oil tankers, failing once but succeeding with the second. The tanker and crew was diverted to one of its ports, a move that a government claimed is illegal. A spokeswoman said “(the government is) deeply concerned about Iran’s unacceptable actions which represent a clear challenge to international freedom of navigation.”

  • The US then shot down an Iranian drone, claiming it was flying too close to one of its warships.

  • Iran then threatened to begin processing weapons grade uranium

 All of this has taken place in the Strait of Hormuz, one of the world’s most important shipping routes, which has the potential to cause significant economic impact around the world.

If war does break out, the consequences are likely to be devastating.

Pressures Mounting on All Sides

US President Donald Trump caused a sensation by delivering a campaign of “maximum pressure” on Iran, causing many to fear military conflict, following the attack on the tankers in the Gulf of Oman.

This approach – not Iranian actions – has been stated as being the original source of rising tensions between Iran and the West.  

The EU delivered plans for a maritime force to defend shipping in the Strait of Hormuz, however this has been rejected by the Iranian vice-president, Eshaq Jahangiri, stating that such a move to protect the Gulf would only bring insecurity.

Iran’s foreign minister, Mohammad Javad Zarif, congratulated new UK prime minister, Boris Johnson, with the message, “Iran does not seek confrontation. But we have 1,500 miles of Persian Gulf coastline. These are our waters and we will protect them.”

The European mission focuses on ensuring free navigation through one of the world’s most important waterways, although categorically stating it would not form part of the USA’s “maximum pressure” policy.

 French Foreign Minister, Jean-Yves Le Drian, said, “On the diplomatic front we want to create the conditions for inclusive regional talks on maritime security, this is the opposite of the US policy of maximum pressure.”

 This move presents evidence of just how strained the relationship between the US and the UK, as well as Europe in general, have become.

The Importance of the Strait of Hormuz for UK Energy

The Strait of Hormuz is one of the world’s most important oil passageways and the impact it can have if access is denied would be colossal.

 Every day, nearly 21 million barrels of oil go through this passage via oil tankers, that’s approximately a fifth of the world’s oil. But it also offers transport for liquefied natural gas from Qatar, the biggest global producer of LNG, which exports nearly all of its gas through the strait.  

It’s a vital route for the main oil and LNG exporters in the Gulf region, and although there are some other routes for oil – such as land-based pipelines – the capacity is significantly lower than by ship, with a total full capacity of roughly 6.8 million barrels a day.  

Oil going through the Strait of Hormuz in 2018 largely went to China, Japan and India with South Korea and the USA also receiving shipments. The UK does receive some oil through the strait, but the bigger impact of this crisis comes from the LNG, of which the UK receives roughly a third of its supply.

If the Strait of Hormuz became inaccessible, as many experts believe is likely with conflict, then we could see many of the world’s major economies suffer considerably. 

 With increased attacks, oil and gas prices are likely to see a significant spike which, if a long-term conflict is engaged, could tip many economies into recession. It’s also likely that we’d see accelerated funding and support of renewable power sources to reduce dependency on fossil fuels.

Limitations on exports from this region would put a strain on global supply, likely causing a significant spike in the cost of oil, which is likely to raise demand, and therefore cost, on other commodities. The impact on prices can be seen in our full market analysis for July 2019.

 

About the Author

This post has been taken from the “Not the Norm” section of our monthly energy markets report, compiled by our Trading Desk for July 2019. If you’d like to receive regular updates on the state of the markets and find out more about influencing factors then you can sign up by following the link below:

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