Risk of high oil prices through Iran sanctions would be short-lived, reports Moody’s

Higher oil prices that could potentially result from new US and European Union (EU) economic sanctions against Iranian oil exports would be credit-positive for international oil companies (IOCs) overall, but negative for corporate sectors such as retail, oil refining and European car manufacturers,  Moody’s Investors Service has said in two new reports published today.

However, Moody’s points out that the risk of a $150 per barrel oil price resulting from Iran blocking the Strait of Hormuz – a key export route for oil and gas producers – is low because the blockade would be short-lived.

Olivier Beroud, Moody’s London-based managing director for EMEA corporates, said: “As most IOCs have no or very limited exposure to Iran in terms of their overall production, higher prices triggered by a supply squeeze from the sanctions on Iran would benefit their oil exploration and production (upstream) operations considerably.”

According to Moody’s, these gains would more than offset any adverse effects on IOCs’ refining (downstream) businesses, which typically account for a much smaller portion of their total operating profits and cash flows.”

However, Steven Wood, Moody’s New York-based managing director for US corporates, added: “An oil shock resulting from a US/EU economic confrontation with Iran would ripple throughout other industries around the world, and could also derail the global recovery.”

Moody’s defines an “oil shock” as a period lasting at least several months during which oil prices rise to a sustainable $150 per barrel. The rating agency has identified retail, car manufacturing and airline industries as potentially being hardest-hit in such a scenario. It said retailers, restaurants and other industries that depend on discretionary spending would suffer if fuel prices surged for consumers, adding that rising transportation and distribution costs would weaken revenues for European retailers.

David Staples, managing director for GCC corporates based at Moody’s Dubai office, said: “The magnitude of oil price increases linked to the EU and US sanctions, which take effect from June, will depend in part on how strictly they are adhered to.”