Iran Strikes Reverberate Across Persian Gulf Economy

Iran Strikes Reverberate Across Persian Gulf Economy
Benoit Faucon,Rory Jones and Costas Paris Jan. 8, 2020 https://www.wsj.com/articles/iranian-strikes-alter-commerce-travel-in-pe...

Shippers divert cargo, airlines cancel flights following Iranian missile attacks on U.S. forces in Iraq

DUBAI—Two major tanker operators, including Saudi Arabia’s state-controlled Bahri, suspended crossings in the Strait of Hormuz Wednesday, as the economic fallout from rising U.S.-Iranian tensions, including an Iranian military strike on U.S. bases in Iraq, rippled throughout the region.

Hours after Iran’s attacks, the economic reverberations jolted the Persian Gulf region. Strikes between the U.S. and Iran now threaten to disrupt vital travel and trade routes in what would be a devastating blow for Gulf countries seeking to diversify from a dependence on oil.

A third operator, oil giant Saudi Aramco, was considering diverting tankers carrying its products to avoid the Strait of Hormuz, according to people close to the oil giant. Aramco didn’t immediately respond to requests for comment. Aside from Bahri, Brazilian oil company Petrobras also kept some of its tankers away from the Strait.

Any disruption in tanker crossings could roil energy markets. Some 20% of the world’s oil supply passes on tankers through the Strait of Hormuz, a narrow waterway between the Persian Gulf and the Indian Ocean.

International benchmark, the Brent crude, climbed more than 4% immediately after news of the attack. But it closed down 4% to $65.22 a barrel after President Trump signaled no further U.S. military action and said Iran appeared to be backing away from further conflict.

Brokers said oil tanker transits through the Strait are expected to return to normal over the next couple of days.

Global airlines canceled flights over Middle East airspace Wednesday after the Federal Aviation Administration announced it would prohibit U.S. carriers from traveling in airspace over Iran, Iraq and the Persian Gulf.

The region has already suffered months of bubbling tensions between the White House and Tehran, sparked by the U.S. decision to snap back economic sanctions on Iran. The killing of Maj. Gen. Qassem Soleimani has further inflamed the situation.

In response to the killing, Iran fired more than a dozen ballistic missiles at U.S. forces in Iraq at about 1.30 a.m. local time Wednesday, according to U.S. officials, but didn’t cause casualties.

Increased geopolitical risk also raised the cost of borrowing money for Middle Eastern countries this week. “The biggest fallout was felt in Iraq, largely because of the proximity to Iran and the fact that the attacks took place on their soil,” said Richard Segal, credit analyst at Manulife Asset Management.

Shipping companies in the region diverted cargoes to Oman, according to a U.S. official, rather than to the United Arab Emirates, a U.S. ally that Iran has threatened with retaliation for any further White House actions.

Some vessels switched off their tracking systems as they sailed through the Strait of Hormuz, while others were delaying their loadings out of the Persian Gulf, cargo-tracking firm Kpler said. Other ships changed course or delayed departures to avoid the Strait, the company said.

Many tanker operators and cruise ship companies are adding armed security guards to their vessels, and state security forces have doubled their presence at cruise terminals in Dubai and Oman, said cruise operators.

Iranian shipping firms and state-run energy companies are also taking steps to prepare for possible attacks, said current and former Iranian oil officials. The measures include asking managers to review evacuation plans and firefighting procedures. Managers of offshore oil platforms and onshore oil fields have been authorized to orchestrate orderly shutdowns if needed, the officials said.

EgyptAir and Dubai-based carriers Emirates Airline and Flydubai said they canceled flights to and from the Iraqi capital, Baghdad, on Wednesday. Those carriers followed Bahrain-based Gulf Air, Saudi Arabia’s Flynas and Royal Jordanian Airlines, which canceled flights to and from Baghdad on Friday in response to the U.S. killing of Gen. Soleimani.

Air France, Qantas and KLM also suspended all flights over Iranian and Iraqi airspace.

U.S. carriers don’t fly to the Persian Gulf region, but Delta Air Lines Inc. and United Airlines Holdings Inc. flights between New York and India skirt to the north of Iraq and Iran.

The possibility of a regionwide conflict has spurred U.S. allies Saudi Arabia and the U.A.E. in recent weeks to make peaceful overtures to Tehran, according to U.S. and Saudi officials.

Following Wednesday’s strikes, however, Tehran warned the U.A.E. would be next if Washington takes further military action against Iran.

“If these [U.S.] fighters make an attack, Iran will also rain missiles on the U.A.E.,” the Islamic Revolutionary Guard Corps. said on its Telegram channel Wednesday.

The energy industry in the Gulf has been on high security alert since September, when drone and missile attacks on Saudi Arabia’s oil facilities took out half of the kingdom’s oil production. The strikes pushed oil prices up 14%. Saudi Arabia blamed Iran, which denied involvement.

That assault also followed a series of explosions and sabotage attempts against ships in the Persian Gulf, for which the U.S. blamed Iran. Those incidents already had increased global insurance and transportation costs and prompted the U.S. and U.K. militaries to increase their presence in the region.

The U.A.E, home to the city-state of Dubai, is less than 100 miles across the Persian Gulf from Iran and has become the region’s main trading hub, dependent on a large expatriate Western and Asia population. The U.A.E. leadership also has been one of the most vocal opponents of Iran’s expansion in the Middle East by way of proxies in Yemen, Lebanon and Syria.

Emirati energy minister Suhail al-Mazrouei acknowledged his country was vulnerable to regional conflict, but said it didn’t want a war with Iran.

“We are very close to Iran, the last thing we want is tension in the Middle East,” he told an energy conference in Abu Dhabi Wednesday morning.

Mr. Mazrouei declined to comment on any new security measures the oil industry might be implementing. But U.S. and Emirati officials said the U.A.E. energy infrastructure, like Saudi Arabia’s, is particularly vulnerable to attacks.

After September’s attacks on Saudi oil facilities, the U.A.E. commissioned a study that concluded its energy infrastructure would be unable to cope with an Iranian attack, according to a person familiar with the report.

The Organization of the Petroleum Exporting Countries isn’t debating an emergency gathering and doesn’t foresee any major disruptions, Mr. Mazrouei said. Five of the group’s 14 member nations—including de facto leader Saudi Arabia and Iran—border the Persian Gulf. “We are not forecasting any shortage of supply unless there is a catastrophic escalation which we don’t see,” he said.

—Summer Said, David Hodari and Sarah McFarlane contributed to this article.