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Affinity Policy Comment 22 april 2024

Coming Full Circle

Tit-for-tat actions by Israel and Iran over the past week have marked an unprecedented move into direct conflict between the Middle East’s two biggest military powers. Anticipation of this development helped to push crude prices to their highest levels since October and the start of Israel’s campaign in Gaza. But Israel’s limited aerial assault on the central Iranian city of Isfahan late last week could mark the beginning of the end in the latest escalatory cycle of conflict in the region.

Iranian state media reported several explosions over Isfahan, around 400km south of Tehran, in the early hours of 19 April. Oil prices jumped quickly in response to news of the attack, surging by almost USD 3.50 per barrel, about 4 per cent, to above USD 90 per barrel, in a way that they noticeably did not immediately after Iran launched a drone and missile strike on Israel overnight on 13-14 April, in response to a suspected Israeli air strike on an Iranian diplomatic compound in Syria’s capital, Damascus, at the start of April. But that partly reflected timing, as the Iranian attacks occurred over a weekend, when the market was not trading, and the fact that oil prices had risen the week before in anticipation of the strike that had been widely advertised by Iran.

Oil prices relinquished the gains derived from the attack almost as quickly as they made them. But the key questions for markets are whether the strike on Isfahan will be the limit of Israel’s retaliation, how Iran will respond, and the extent of the threat to the region’s oil, gas and other energy infrastructure.

It is probable that the looming Passover holiday from 22 to 30 April could have helped limit the scope of Israeli retaliation, as they may not have wanted to carry out a major escalation ahead of Passover to avoid the threat of war hanging over the country during the holiday. However, it is possible that more attacks could come after Passover.

From a strategic point of view, there would be logic in making Iran’s energy facilities the primary target, given that it would hit the country’s economic heart and squeeze the leadership at a time when the economy is already struggling thanks to sanctions. However, an attack on energy facilities, or one of Iran’s nuclear sites, at this stage could be seen by Tehran as disproportionate. Given Iran’s renewed vows to respond to every Israeli blow, such an escalatory move could push the wider region to the brink of war.

An attack on Iranian energy infrastructure could also see Tehran respond by, at best, disrupting maritime traffic in the Arab Gulf and, at worst, closing the strait of Hormuz, a threat it has regularly made. Crude exports through the strait averaged 12.6 Mn bpd in 2023, or 30 per cent of global seaborne exports, according to Kpler data. Including products, that volume rises to 15.4 Mn bpd, making up 23 per cent of global seaborne trade.

But the limited nature of Israel’s latest attack, and concerted effort by Iranian officials, military personnel, and media to downplay its severity and impact so far suggests it could feasibly provide a de-escalatory off-ramp for Iran, as the Islamic Republic will not be under pressure to retaliate.

Meanwhile, the US remains unlikely to strongly enforce sanctions on Iran and risk sending oil prices higher in an election year, even after the House set new restrictions in motion against the country’s energy sector.

Legislation passed over the weekend seeks to broaden sanctions against Iran to include foreign ports, vessels and refineries that knowingly process or ship Iranian crude in violation of existing US rules. It would also expand secondary sanctions to cover transactions between Chinese financial institutions and restricted Iranian banks used to purchase petroleum and oil-derived products.

Any new restrictions, if introduced, may affect exports by between 200,000 and 500,000 bpd of Iran’s average exports of 1.2-1.5 Mn bpd currently. Oil prices could also rise in the process as buyers compete for supplies, warranting Biden’s electoral suicide by “making gas more expensive”.

In other news, the IMF has upgraded its forecast for global economic growth this year, primarily because of the stronger-than-expected performance of the US economy. In fact, despite gloomy predictions, the global economy remains remarkably resilient, with steady growth and inflation slowing almost as quickly as it rose, according to IMF head of research Pierre-Olivier Gourinchas.

As a result, the IMF expects global growth of 3.2 per cent in 2024 and 2025, on par with estimated global growth in 2023. The IMF upgraded its 2024 outlook by 0.1 per cent from its January report. The IMF also has upwardly revised projected US growth for this year, which it now expects to be higher than in 2023. The US appears to be the only advanced economy to successfully overcome the effects of the several economic shocks in this decade.

On the other hand, Europe, China and many other economies are still struggling to turn the page from the pandemic and cost-of-living crises. Inflation remains a concern globally, particularly with the recent rise in oil prices. Shipping costs have increased because of Houthi attacks on vessels in the Red Sea, but are still below the peaks of the period between 2021 and 2022, and appear to be starting to decline.

A hypothetical IMF report scenario that involves an escalation of conflict in the Middle East would send oil prices 15 per cent higher and more than double average container shipping costs. It would curb global growth numbers by 0.5 per cent in 2024-2027. However, for now, the world doesn’t appear to be in that scenario. On the contrary, months of Red Sea skirmishes and even the Iranian drone and missile attack against Israel on 14 April and the subsequent retaliation had a relatively muted impact on markets.

Economic policy developments in China could raise geopolitical tensions. China’s own 5.3 per cent GDP growth figure for Q1 is higher than the IMF’s projection, but the organisation still believes the downturn in China’s real estate sector is offsetting Beijing’s fiscal stimulus measures. With an economy that has relatively weak domestic demand but is growing, there would be an increased reliance on the export sector, and that is something that, in the context of very tight trade tensions, could be complicated, according to the IMF.

The IMF for some time has warned of growth risks from what it terms “geofragmentation” – the division of once-global markets for commodities and other products based on political affiliation. Trade growth between economies in politically distant blocks has been 2.4 per cent slower than between politically aligned countries since Russia’s invasion of Ukraine in February 2022, a trend that is expected to accelerate going forward.


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    [email protected]

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    Contact: Tom Morrison
    [email protected]
    +44(0) 20 3142 0128

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    Our established tanker chartering teams serve the industry from London, Houston and Santiago delivering a highly proficient spot chartering service with a prime position in the fuel oil market. The team has close relationships with oil majors, national oil companies, oil traders and major ship owners and operators. 
    Our ethos for operations and post-fixture is simple: these roles are as important to us as the chartering/commercial function, and we continue to apply those same principles of professional ship broking throughout the life of each fixture.

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    Affinity Valuations Limited Terms of Business

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    +44 (0)20 3142 0144

    Carbon

    Using tailored analytics platforms, we offer client-specific advisory and trading services across the global carbon markets. Contributing to hedging strategies, sustainability reporting and financing requirements, our aim is to assist clients in managing their financial exposure to the approaching energy transition.

    Contact: Hugo Wilson
    [email protected]
    +44(0)20 3142 0121

    Containers

    Our specialised Container team in South America arranges freight & logistic solutions primarily for the mining and perishable industries.

    Contact: Andrea Meza Allemant
    [email protected]
    +51 99 115 2393

    Dry Cargo

    Our dry bulk chartering teams in Sydney, Melbourne, Perth, Santiago, Lima, Montevideo, Buenos Aires, Singapore and London are cargo-focussed and they fix voyage, COA and time charter business on behalf of their clients with a wide range of ship owners.
    For Atlantic business please contact Hans Bredrup
    For Pacific business please contact Rahul Khanna

    Contact: Hans Bredrup
    [email protected]
    +56 99 887 3036
    Contact: Rahul Khanna
    [email protected]

    LNG

    Our young and dynamic LNG team possess wide-ranging experience of spot and term charters working with all major LNG shipowners and charterers. The LNG team has close interaction with the Newbuilding and Sale & Purchase divisions with an unrivalled track record of contracting LNG newbuildings and in the sale and purchase of LNG assets.
    We maintain up-to-date knowledge and an understanding of new technologies within the LNG sector to ensure that our clients can make the most suitable and cost-effective decisions on shipping solutions.

    Contact: Joni Mackay
    [email protected]
    +44(0)20 3142 0133

    Newbuilding

    Our Newbuilding team has concluded over 500 newbuildings of all types, including LNGCs, FSRUs, drillships, crude tankers, product tankers and dry cargo vessels. We have contracted in all major newbuilding centres globally, with particular focus on the Korean Shipyards.

    Contact: Nick Wood
    [email protected]
    +44(0)20 3142 0111

    Offshore

    Affinity Offshore is based out of our Oslo and Houston offices. The Team focuses on world-wide sale & purchase of offshore support vessels, as well as chartering – particularly in the Americas and Mediterranean/MENA regions.

    Contact: Tor-Øyvind Bjørkli
    [email protected]

    Research

    Our research department combines real time market information with econometric modelling and the latest technology. 

    Contact: Sevita Kondyliou
    [email protected]
    +44(0)20 3142 0182

    S & P

    Our Sale & Purchase team has extensive experience of working with private clients, national shipping companies, major corporates, oil companies, grain houses and institutional investors. We provide a cradle to grave services across all shipping sectors. We operate from London, Singapore and Seoul to give 24-hour coverage of the markets, working for both newbuilding and second-hand buyers.

    Contact: Tom Morrison
    [email protected]
    +44(0) 20 3142 0128

    Tankers

    Our established tanker chartering teams serve the industry from London, Houston and Santiago delivering a highly proficient spot chartering service with a prime position in the fuel oil market. The team has close relationships with oil majors, national oil companies, oil traders and major ship owners and operators. 
    Our ethos for operations and post-fixture is simple: these roles are as important to us as the chartering/commercial function, and we continue to apply those same principles of professional ship broking throughout the life of each fixture.

    Contact: Tim Gurdon
    [email protected]
    +44(0)20 3142 0142

    Valuations

    We provide transparent, objective ship valuation service to major owners, banks and other financial institutions at short notice and a daily basis. We provide a retainer service for regular fleet valuations.

    Affinity Valuations Limited Terms of Business

    Contact: Stuart Morrison
    [email protected]
    +44 (0)20 3142 0144

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