The risk of military confrontation between the United States (US) and Iran has risen considerably. On 13 June 2019, two tankers were damaged by explosions in the Gulf of Oman, a strategic waterway crucial to global energy supplies. The US accused Iran of carrying out the attacks, and announced the deployment of a further 1,000 troops to the Middle East for defensive purposes. On 20 June 2019, Iranian forces shot down a US drone allegedly violating Iranian airspace, escalating diplomatic tensions further.
At approximately 03:12 (GMT) on 13 June 2019, 19 nautical miles south of Iran’s coastline, a Marshall Islands-flagged tanker was hit by an explosion, severely damaging the hull of the ship. The tanker was carrying approximately 75,000 tonnes of the flammable petrochemical naphtha. A second explosion at 04:00 (GMT) hit a Panama flagged tanker, 21 nautical miles off the Iranian coastline. All crew members survived both incidents.
On 17 June 2019, the US military released video footage allegedly showing the crew of an Iranian Islamic Revolutionary Guard Corps (IRGC) Gashti Class patrol boat removing an unexploded limpet mine from the starboard side of the vessel. Iran has denied the accusations, leading to a diplomatic stand-off with potential security repercussions for global energy supplies.
Organisations will need to be wary of attacks on maritime and energy assets by Iran in the one-year outlook. Whilst Iranian involvement in the 13 June tanker attacks has not been definitively proven, the IRGC is the only regional force willing and able to carry out sophisticated attacks of this nature.
On 17 June 2019, acting US Secretary of Defense Patrick Shanahan stated that the US does not seek conflict with Iran. However, retaliatory action by the US on Iranian assets seems more probable following the shooting down of a US drone on 20 June.
Retaliatory strikes by the US would most likely target military installations, minimising the risk to commercial assets active in the Strait of Hormuz and wider Gulf of Oman.
A limited strike by the US would raise war risks, particularly if Iran responds in a disproportionate manner. However, the core scenario remains that neither party will seek full interstate war. Iran would be unlikely to win a war with the US and its regional allies, and would likely face economic collapse, while war would not receive significant domestic support in the US.
The risk to investors extends beyond the Gulf of Oman to energy infrastructure located inland. Both Saudi Arabia and United Arab Emirates (UAE) have been drawn into the tit-for-tat attacks that make up part of the wider geo-political tensions that punctuate the Middle East at present.
Alleged Iranian support for Houthi rebels in Yemen will continue to present risks to oil fields and refineries across the border in Saudi Arabia. In recent months, Houthi rebels have demonstrated enhanced capabilities, deploying unmanned aerial vehicles to target assets in Saudi Arabia.
In May 2019, operations at the East-West pipeline were halted after a UAV attack.
The Strait of Hormuz, which links the Gulf of Oman and the Persian Gulf, is the most important energy supply waterway in the world. The strait is the only route to transport oil from the Persian Gulf to the world’s oceans. On average 16.8 million barrels of oil a day has passed through the Strait of Hormuz since the start of 2018.
Iran’s actions suggest that it may try to prevent vessels passing through the strait for a limited time, deploying mines and cruise missiles. Any obstruction of the strait would lead to a rise in global oil prices, with close to 30% of the world’s global oil supply at risk of disruption. Much of the world’s spare production capacity is also located in the Middle East, exacerbating the impact of trade disruption.
Upon news of the tanker attack, Brent crude prices increased by 4% to USD 62.4 per barrel, reflecting supply concerns. Following Iranian military action in shooting down a US drone on 20 June, the international oil marker rose by 2.7% at USD 63.53 per barrel.
Incidents in the Gulf of Oman will give President Donald Trump the motivation to sustain a policy of maximum pressure against Iran. On 24 June 2019, the US introduced additional sanctions on Iran in response to Iranian actions in the Gulf of Oman, which targeted Supreme Leader Ali Khamenei.
As Trump works to highlight the risks posed by Iran to the international community, he will also increase pressure on European and Asian allies to follow his lead in withdrawing from the Joint Comprehensive Plan of Action (JCPOA) with Iran.
At the same time, Iran will use the opportunity to place pressure on remaining signatories to maintain the agreement, as it threatens to reach limits on uranium enrichment. Along with broader regional volatility, this situation will continue to hamper economic engagement with Iran by European firms, which has stalled following US withdrawal from the JCPOA in 2018.
Similarly, any escalation in violence in the region may weigh on trade and investment in the Gulf more broadly.
5 Key Takeaways
- On 13 June 2019, two tankers were damaged by explosions in the Gulf of Oman, a strategic waterway crucial to global energy supplies
- On 20 June 2019, Iranian forces shot down a US drone allegedly violating Iranian airspace
- On average 16.8 million barrels of oil a day has passed through the Strait of Hormuz since the start of 2018
- On 20 June 2019, Brent crude prices were up 2.7% at USD 63.53 per barrel
- The Baltic and International Maritime Council (BIMCO) advised shipping companies to divert vessels from the area of the 13 June attacks.
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Hong Kong, Bangladesh, Kenya and Madagascar all of which have been the subject of recent enquiries from our client base.