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EU-US Iranian oil sanctions threaten corporations – report

22nd May 2012

Oil & Gas companies to benefit from higher oil prices resulting from sanctions on Iran but global corporate sectors would suffer

Higher oil prices that could potentially result from new US and EU economic sanctions against Iranian oil exports would be credit-positive for international oil companies (IOCs) overall, but negative for corporate sectors such as airlines, oil refining, European autos and Retail, found a new report.

Two reports published on Tuesday  by Moody's Investors Service point out that the risk of a USD 150 bbl oil price resulting from Iran blocking the Strait of Hormuz, a key export route for oil & gas producers, is low because the blockade would be short-lived.

"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,” says Olivier Beroud, Moody's London-based Managing Director for EMEA Corporates. 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, 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," cautions Steven Wood, Moody's NY-based Managing Director for US corporates. Moody's defines an "oil shock" as a period lasting at least several months during which oil prices rise to a sustainable USD 150 per barrel (bbl).

The rating agency has identified the following sectors as potentially being hardest-hit in such a scenario:

• European automakers would face a greater risk from an oil shock than their US or Asian counterparts, although profits and cash generation for US automakers would also come under great pressure.

• Airlines would suffer operating losses from sustained higher costs for jet fuel, and the fare increases that result would hurt passenger demand worldwide. European airlines face more exposure to any political instability in the Middle East than their US or Asian counterparts.

• Retailers, restaurants and other industries that depend on discretionary spending would suffer if fuel prices surged for consumers. Rising transportation and distribution costs would weaken revenues for European retailers. Makers of consumer durables would also see pressure from reduced consumer demand and higher raw-material prices. However in the US, big-box discount retailers and warehouse clubs including Wal-Mart, Target, Costco and BJ's Wholesale could benefit as consumers economise.

"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," said David Staples, Managing Director for GCC corporates based at Moody's Dubai office.

At this stage, it is unclear to what degree Iran's top customers will reduce their imports in order to avoid the sanctions. (The US sanctions stipulate that countries only have to cut their purchases "substantially" to be exempt.) Other major oil-producing countries have capacity to cover the loss of supply from Iran, although it will take time for this to become operational.