The International Monetary Fund (IMF) stressed Wednesday that concerns about geopolitical oil supply risks “are again increasing”.
In a report, the IMF affirmed that Iran-related risks “stand out since the International Atomic Energy Agency (IAEA) released its update on the country’s nuclear program in mid-November, although geopolitical risks are broader and also apply to Iraq, Syria, South Sudan, and Nigeria”.
It added that “the likelihood of an Iran-related supply disruption remains difficult to determine, but recent price developments suggest that oil markets assign a low, albeit rising, probability”.
According to the Fund, Iran’s closure of the Strait of Hormuz would “neutralize a large part of current OPEC spare capacity,” saying “alternative routes exist, but only for a tiny fraction of the amounts shipped through the Strait, and they may take some time to operationalize while transportation costs would rise significantly”.
“The oil market impact of intensified concerns about an Iran-related oil supply shock (or an actual disruption) would be large, if not compensated by supply increases elsewhere,” the report stressed.
It indicated that financial flow sanctions imposed by some OECD countries against Iran may be “tantamount” to an oil embargo and would imply supply declines of around 1.5 million barrels daily, “comparable with the average decline during major disruptions since the first oil shock and to the setbacks to Libyan production in 2011”.
“A blockade of the Strait of Hormuz would constitute, and be perceived by markets to presage, sharply heightened global geopolitical tension involving a much larger and unprecedented disruption,” it said.
The Fund affirmed that “supply disruption would likely have a large effect on prices, not only reflecting relatively insensitive supply and demand in the short run but also the current state of oil market buffers”.
“A halt of Iran’s exports to OECD economies without offset from other sources would likely trigger an initial oil price increase of around 20-30 percent (about USD 20-30 a barrel currently), with other producers or emergency stock releases likely providing some offset over time,” the report showed.
It stressed that “a Strait of Hormuz closure could trigger a much larger price spike, including by limiting offsetting supplies from other producers in the region”.
Meanwhile, State Department Spokeswoman Victoria Nuland told reporters at a briefing that the U.S. “is very cognizant” that as a legislation is being instituted on Iran, “as we work with countries around the world to try to decrease countries’ dependence on Iranian crude and have them diversify, that we need to do this in a phased and managed way so that we don’t have untoward impact on oil markets, so that countries can diversify, so that there is more supply”.
“We’re working not only to encourage countries to diversify away from Iran, but we’re also working with other suppliers to pick up the slack, because obviously we’re conscious that the health of economies around the world is a major concern and something that we have to protect,” she stressed.
Nuland affirmed “we’re trying to do this in a phased and managed way. Nonetheless, we are beginning already to see a bite into Iran’s resource space with which it can fuel its program as countries make, as countries make decisions to seek crude oil from other countries”.