Fitch Ratings has said in a newly-published report that the embargo on Iranian oil imports to the European Union will increase geopolitical risk in the Middle East region supporting high oil prices.
Iran’s reaction to the EU sanctions, and particularly to new US sanctions signed by the US president at end-December ۲۰۱۱, is difficult to predict, according to a Fitch Ratings statement received here.
Iran called for an immediate end to oil sales to the EU in response to the announced ban. Blocking the Strait of Hormuz, was also mentioned by Iran recently. Fitch considers this to be a low-probability scenario, and believes any obstruction to trade routes would have a short duration if it did actually transpire.
“Fitch believes that the EU ban on Iranian oil is largely credit neutral for EU integrated oil and gas companies,” said Arkadiusz Wicik, director in Fitch’s European energy, utilities and regulation team.
“The cash flow impact of the ban may be negative for refining operations, but should be positive or neutral for upstream operations.”
The most likely scenario is that the EU embargo will result in higher oil prices.
However, prices may not necessarily increase markedly from current levels as some of the risks related to the EU ban on Iranian oil appear factored in already.
The ban will likely have a moderately negative impact on EU refiners as high oil prices may further erode demand for refined products in Europe.
This would worsen the already weak supply-demand balance in European refining.
The EU embargo may also change oil price spreads in Europe as Iranian crude imports would likely be replaced with alternative crude, which may be priced at a lower discount to Brent than Iranian crude oil.
EU refiners’ security of oil supply is unlikely to be substantially affected by an Iran ban.