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Re-Impositions Of Sanctions On Iran: Implications For Pakistan – OpEd

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The recent decision of the U.S. president to pull its country out of the nuclear deal signed by six super powers of the world with Iran has serious implications for the world in general and Pakistan in particular. Contrary to policy recommendations, President Donald Trump’s decision to pull-out from the P5+1 Joint Comprehensive Plan of Action has already hiked crude oil prices to three-year highs. Since Pakistan and Iran enjoy common border, the geopolitical tension in its backyard must be handled with extreme care as policy decisions of the country are influenced by its relationship with the United States and Saudi Arabia.

From a domestic perspective, if one assesses Pakistan-Iran trade relationship with Iran the likely implications are negligible. Some analysts say that the decision may become a major roadblock in the execution of any energy supply projects (IP gas pipeline, possible expansion of electricity imports). As regards implications on the equity market the pressures imposed through higher global crude oil prices will weigh on an already precarious current account situation and will also not bode well for investors’ sentiments.

According to some economic analysts, having myopic view the hike in crude oil price bodes well for E&P sector and revenue collection. They also believe that influx of foreign exchange from Saudi Arabia will increase. However, they tend to forget that country is already suffering from serious balance of payment crisis.

There are speculations that U.S. sanctions against Iran would lead to a disruption in supply which would further tighten global supplies. Iran’s oil exports were 2.6 million barrels per day (bpd) in April 2018. However, gains have been capped by a stronger U.S. Dollar, which affects demand, and rising U.S. production. The uncertainties over Iran are helping to underpin prices with buyers coming in on weakness, but refraining from buying enough to drive the market through resistance and into new multiyear highs. This is holding the markets in a range and giving the appearance of a sideways trade.

The move has been initiated by the US president and many ‘me too’ are trying to please him. The crusade is led by Israeli prime minister, who is licking wounds caused to Israel in Lebanon by Hezbollah. The US is also adamant at taking revenge of its defeat in Syria, where it also faced Hezbollah. The west is never tired of accusing Hezbollah being supported by Iran but it is in no way part of Islamic Revolutionary Guards of Iran.

The US commentators have very cunningly convinced OPEC led by Saudi Arabia to curtail crude oil output which has resulted in 1) substantial increase in crude oil price and 2) significant hike in the output by the US and Russia. At present, Saudi Arabia has slipped to third position in terms of daily oil output. The US has also emerged as one of the major exporter of crude oil. Therefore, Iran with a daily export of 2.6 million barrel has become ‘of no consequence’. Even if export of oil from Iran is stopped completely, it would be compensated by other producers very quickly.

As a daily ritual, I have to write a few lines on commodities market and factors driving their prices. The most bizarre part is writing about the factors driving crude oil prices. The usual jargon used are increase/decrease in rig count in the US, movement in US stock piles, turmoil in Venezuela and MENA (countries including Iraq, Libya, and Nigeria). Little reference is made to investment by hedge funds.

Crude prices fell after the U.S. Energy Information Administration reported a surprise build of 6.2 million barrels in the week-ending April 27. Traders shrugged off the news because the surprise rise in inventories was largely concentrated on the West Coast where supply jumped nearly 5 million barrels.

If one peeps into history, it becomes evident that the price of crude oil is driven by any factor, but certainly not by demand and supply alone. The moral of the story is that developed economies, through hedge funds make millions of dollars by maneuvering crude oil prices. To achieve their objective they often breach agreements. Super powers are notorious for breaching the agreements for achieving their motives.

Therefore, re-imposition of sanctions on Iran will not be a surprise but an example of yet another blatant violation. However, they must not forget that even stopping oil export from Iran completely will neither make an immediate difference for Iran nor sky rocket oil prices.

Comments from Iran’s Foreign Minister triggered a volatile short-covering rally on Thursday after he said U.S. demands to change its 2015 nuclear agreement with world powers were unacceptable.

Trump and traders are waiting for the Europeans to hand Trump a plan to save the Iran nuclear deal by the end of next week. However, the situation remains uncertain enough that buyers are willing to come in on dips. If the Europeans can come up with a plan that satisfies Trump then prices are likely to decline sharply on speculative profit-taking and shorting. If Trump moves forward with sanctions then prices could rise, but gains are likely to be limited by rising U.S. production.

The moral of the story is that developed economies, through hedge funds make millions of dollars by maneuvering crude oil prices. To achieve their objective they often breach agreements. Super powers are notorious for breaching the agreements for achieving their ulterior motives. Therefore, re-imposition of sanction on Iran will not be a surprise but an example of yet another blatant violation. However, they must not forget that even stopping oil export from Iran completely will neither make an immediate difference for Iran nor sky rocket oil prices.


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Shabbir H. Kazmi

Shabbir H. Kazmi

Shabbir H. Kazmi is an economic analyst from Pakistan. He has been writing for local and foreign publications for about quarter of a century. He maintains the blog ‘Geo Politics in South Asia and MENA’. He can be contacted at [email protected]

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