The oil embargo against Iran which comes into force on July 1 may be a blow to the UK insurance sector.
As soon as the oil embargo is imposed, Iran’s oil buyers will lose access to the London-based insurance market that protects 95% of the tanker shipments against oil spills or collisions.
Practically, this means that companies will not take the risk of multibillion-dollar liabilities arising from an uninsured incident, and the insurers will be deprived of fees stemming from the lucrative oil market.
The reason behind the sanctions was the IAEA report claiming that Iran had worked on developing nuclear weapons before 2003 and these works might continue to this day.
At the end of January 2012, the EU approved a package of restrictive measures against Iran including a ban on import, purchase and transportation of oil and petroleum products from Iran, as well as a ban on related financial and insurance operations.
Asian countries such as China, India, Japan and South Korea have traditionally been the main consumers of Iranian oil. 10% of imports to China, India, South Korea and Japan came from Iran. Turkey was considered the most heavily dependent on Tehran which supplied 51% Ankara’s needs in oil.
Turkey has significantly cut oil imports from Iran. Crude imports totalled 249 barrels a day in March and dropped to 124 barrels a day in May and June. On June 15, two South Korean companies – SK Shipping and Hyundai Merchant Marine – stopped transporting Iranian oil for its refineries SK Energy and Hyundai Oilbank.
India has also decreased on its oil imports from Iran by 38% year-on-year in May. Now Iran is the fifth largest supplier to India, retreating from the second position it held a year earlier. In April, China halved oil imports. China used to be the largest consumer of the Iranian oil. 20% of Tehran’s exports went to China.
Russia who has increased oil supplies to China because of the Iranian ban as it is opposed to the EU oil embargo against Iran. The decline in Iranian exports will be offset by an increase in imports from Saudi Arabia, Kuwait, and the UAE.
Analysts do not expect any increase in oil prices due to sufficient emergency oil reserves in the developed countries, debt crisis concerns in the Euro zone, economic slowdown in the EU, and OPEC capacity to increase the output.
Moreover, markets are largely driven by expectations. The Iranian crude ban has been already priced in. However, price volatility is highly unlikely to disappear as risk of violent developments in Syria is still on the agenda.