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President Trump’s sanctions will trigger a wild oil price ride

The first wave of Donald Trump’s sanctions on Iran will come into effect on Aug 6. So far, the market impact has been fairly limited. However, with the US president ratcheting up his rhetoric against the Rouhani regime this week, it’s time to take a look at how this additional irritant for global trade could impact markets.

President Trump’s decision in May to pull out of the Joint Comprehensive Plan of Action (JCPOA), known commonly as the Iran nuclear deal, was met with consternation from EU allies. China, also said it will “safeguard” the deal, as it is a major consumer of Iranian oil. Yet, in the next 10 days, sanctions come into force that will impact Iran’s ability to purchase dollars, trade in gold and other metals, as well as stopping transactions involving aircraft and vehicles. Sanctions on oil exports will not be introduced until November. The US administration is targeting gold because it was used as a loophole to pay for Iranian oil in the last round of sanctions. The move will hit ordinary Iranians too. The Iranian rial is now basically worthless and Iranians buy the metal as it is a much better wealth preserving asset than any paper printed by the country’s central bank. Indeed, as fears grew that the US could pull out of the nuclear deal, demand for gold in Iran tripled in the first quarter of 2018 to a three-year high, according to the World Gold Council.

History shows there could be a major risk to European banks, so they are likely to be extra cautious. In 2013, Royal Bank of Scotland was fined $100m (£76m) by US authorities for breaching sanctions with Iran, Burma, Cuba and other countries. In 2014, French bank Bnp-paribas agreed to pay almost $9bn to resolve accusations it violated US sanctions against Sudan, Cuba and Iran. Deutsche Bank was also fined $258m for similar reasons. Lessons have been learnt, so risks here are arguably lower.

There has already been an impact on Airbus and Boeing. Following the nuclear deal, the aircraft makers signed $40bn of contracts to sell aircraft to the country. Airbus, although it is European, is subject to US export restrictions because more than 10pc of the parts on its aircraft are manufactured by American businesses such as United Technologies and General Electric. However, investors have shrugged this off. Boeing recently predicted $15 trillion in industry sales over the next two decades. In that context, the loss of $40bn of orders is minor.

Europe’s automakers are also at risk. The PSA Group, manufacturer of Peugeot and Citroën, signed new production deals in Iran worth €700m (£622m) and rival Renault announced a new plant investment to increase production capacity to 350,000 vehicles a year. PSA has since suspended these ventures, noting that these accounted for less than 1pc of revenue. Renault is seeking a waiver. However, Mr Trump suggested that few waivers will be offered.

So, right now, the market impact of Iran sanctions is likely to be pretty limited. The biggest impact could, of course, be felt in the oil industry. The country has almost 10pc of the world’s crude oil reserves. If the situation starts to raise the oil price, the impact on global markets – and inflation – could be significant. Predictably, Iran has threatened to shut down the Strait of Hormuz. Around 30pc of the world’s oil passes through here.

However, it is obvious that if Iran tried to block the strait using mines the superior military might of Western allies will unblock it within days. But the threat of this could send the oil price higher, something President Trump will be keen to avoid. Not only do high oil prices have an impact on US industry but residents of Trumpvoting states are more exposed to a higher oil price. An analysis by Bloomberg showed that voters in red states tend to use significantly more gasoline than those in blue states – and they pay for it from smaller incomes. So, like China targeting soya beans to hit Republican farmers, the Iranian regime will also hit the Trump base should the war of words boost the oil price. The US president knows this too and has said: “We’re ready to make a real deal, not the deal that was done by the previous administration, which was a disaster,” he said.

The major risk is that the tensions will push Iran to restart its nuclear programme. Although unlikely, the threat implies August could see a wild ride for the oil price. But, rest assured, the Trump administration is unlikely to want oil prices to spike ahead of the November midterms.

‘In 2013, Royal Bank of Scotland was fined $100m for breaching sanctions’