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Iran May Adopt ‘Low-Level’ Tactics Supporting Oil, S&P Says

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Feb. 14 (Bloomberg) -- Iran may respond to sanctions with “low-level provocation” such as slowing shipping through the Strait of Hormuz, supporting oil prices, Standard & Poor’s said.

The Islamic Republic could disrupt supplies from the Persian Gulf by imposing tanker inspections or boarding merchant ships in its territorial waters, encouraging markets to view armed conflict increasingly as “a real, if remote, possibility,” Paris-based Jean-Michel Six, S&P’s chief economist for Europe, wrote in one of three reports from the ratings company.

The likelihood of severe disruption of shipments in the Strait, through which 20 percent of the world’s oil flows, is “very low,” though if one did occur, it might drive oil to $150 a barrel and push economies into a recession, according to the reports.

“For oil-producing sovereigns of the Gulf Cooperation Council -- Saudi Arabia, U.A.E., Qatar, Kuwait, Oman and, to a lesser extent, Bahrain -- higher oil prices would actually be beneficial,” said Elliot Hentov, an S&P credit analyst in Dubai. “As oil exporters, they would receive more foreign earnings that they could either use to stimulate demand or improve their government’s balance sheets.”

Stiffening Sanctions

The U.S. and the European Union are imposing tougher sanctions on Iran and Israel has talked of an attack on the Islamic Republic’s nuclear facilities in an attempt to halt its atomic program. Iran, which says the program is for civilian purposes, has threatened to block Hormuz in retaliation.

Oil has risen 8 percent since Dec. 19, when Bank of America Corp. said in a report that crude may surge by $40 a barrel if international sanctions halted supplies from Iran. Oil for March delivery on the New York Mercantile Exchange rose as much as 74 cents to $101.65 a barrel, the highest since Jan. 19, and was at $101.17 at 12:55 p.m. London time. Prices are 19 percent higher than a year ago.

The three S&P reports discuss the impact of rising Gulf tensions on Middle Eastern states seeking to borrow money, the risks that a closure of Hormuz would pose for companies looking for credit and the threats to global economic growth from an oil shock.

To contact the reporter on this story: Ayesha Daya in Dubai at adaya1@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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