Document Text Content
Investment Management Division
Risk of a US-Iran Military Conflict and Other Geopolitical Risks
May 23, 2019
Investment Strategy Group
Discussion Topics
Investment
Management
Division
I. US Policy on Iran
II.
Iranian Actions and Current Economic Conditions
III. Potential for US-Iranian Military Conflict
IV. Implications for the Global Oil Market
1
Risks to Our Views (Presented in our 2019 Outlook)
Investment
Management
Division
• In the near term, the most likely source of a domestic shock is the fallout from one of the
investigations—by multiple state attorneys general and the House of Representatives—of President
Trump.
• The ebb and flow of these investigations will inevitably lead to great market volatility. But there is
greater likelihood that exogenous shocks will come from external sources, rather than domestic ones.
• External exogenous shocks
– Trade War with China (5/17/2019 ISG Client Call) or continued slowing growth in China
– Brexit
– Auto Tariffs
– Russia
– Middle East
– North Korea
– Cyberattacks
– Terrorism
Source: Investment Strategy Group.
2
Timeline: US-Iran Tensions Rise
Investment
Management
Division
Recent Key Events in US-Iran Relations
Date Category Event
7/14/2015 JCPOA JCPOA* finalized between Iran and P5+1
10/13/2017 JCPOA President Trump de-certifies compliance of Iran with JCPOA
5/8/2018 JCPOA President Trump withdraws from the nuclear agreement
8/6/2018 Sanctions Reimposition of sanctions on Iran (precious metals, currency, sovereign debt)
11/4/2018 Sanctions
Sanctions imposed on Iranian petroleum, shipping sector, energy sector, etc.
Six-month waivers issued to eight countries that purchase Iranian oil
4/8/2019 Diplomatic Action US announces it will designate the IRGC as a foreign terrorist organization
5/2/2019 Sanctions Waivers for Iranian oil purchases not renewed
5/3/2019 Military
5/5/2019 Military
US intelligence suggests mobilization of Iranian forces, including photos showing IRGC loading
missiles onto ships
Bolton announces US to deploy carrier strike group and bomber task force to the Persian Gulf,
promising "any attack on US interests or on those of our allies will be met with unrelenting force"
including attacks "by proxy, the Islamic Revolutionary Guard Corps, or regular Iranian forces"
5/8/2019 JCPOA Iran announces it will end compliance with parts of the JCPOA, including uranium enrichment
5/8/2019 Sanctions US imposes sanctions on Iranian industrial metals sector
5/9/2019 Military
Acting Defense Secretary Shanahan presents updated military plan to send up to 120 thousand
troops to the Middle East if Iran attacks US forces or accelerates work on nuclear weapons
5/12/2019 Military 3-4 oil tankers reportedly damaged in a "sabotage" attack off the coast of the UAE
5/14/2019 Military Houthi drones attack Saudi cross-country oil pipeline
5/15/2019 Diplomatic Action US withdraws embassy staff from Iraq
5/19/2019 Military A rocket is fired into Baghdad's Green Zone near the US embassy
5/21/2019 Military A Houthi drone attacks an arms depot at the Najran airport in southern Saudi Arabia
* JCPOA: “Joint Comprehensive Plan of Action”
Source: Investment Strategy Group, White House, US Treasury, New York Times, Bloomberg, Wall Street Journal.
3
Does the US Have a Clear Strategy?
Investment
Management
Division
“The United States is [sending] a message to the Iranian
regime that any attack on US interests or on those of our allies
will be met with unrelenting force. The US is not seeking war
with the Iranian regime, but we are fully prepared to respond
to any attack, whether by proxy, the Islamic Revolutionary
Guard Corps, or regular Iranian forces.”
— NSA John Bolton announcing the deployment of a carrier
strike group to the Persian Gulf, May 5, 2019
“President Trump has sought to put the brakes on a brewing
confrontation with Iran in recent days, telling the acting
defense secretary, Patrick Shanahan, that he does not want to
go to war with Iran, administration officials said, while his
senior diplomats began searching for ways to defuse the
tensions.”
— New York Times, May 16, 2019
“Our aim is not war. Our aim is a change in the behavior of the
Iranian leadership.”
— Secretary of State Pompeo, May 12, 2019
“The Fake News Media is hurting our Country with its
fraudulent and highly inaccurate coverage of Iran. It is
scattershot, poorly sourced (made up), and DANGEROUS. At
least Iran doesn’t know what to think, which at this point may
very well be a good thing!”
— President Trump, May 17, 2019
“Will the president let himself be pushed into a parlous war by John Bolton, who once buoyed the phony case on WMDs in Iraq?”
— Maureen Dowd, New York Times, May 18, 2019
Source: Investment Strategy Group, Twitter, New York Times, Politico.
4
Eurasia Group:
“The Three Principal Players Have Different Perspectives”
Investment
Management
Division
National Security Advisor John Bolton
• “Bolton wants a crisis. He hopes to use the pressure as a maximum containment strategy to cripple the
Iranian economy, increasing domestic opposition to the government, and making regime change more
likely.
• … ‘forcing’ the Americans to engage in military intervention for Bolton [is] a useful pretext to bombing
key nuclear facilities that would set the Iranian program back years or more.”
Secretary of State Mike Pompeo
• “Pompeo wants the band back together. He doesn’t believe the United States can credibly induce the
Iranians towards a more constructive posture by themselves, and accordingly wants a tougher, common
front to force better terms from Iran from a position of strength.
• Pompeo hopes the Europeans and other allies will be more supportive of broader American pressure
against Iran, and a multilateral coalition can come back together.”
President Trump
• “President Trump wants a breakthrough on his terms. He wants to use American power to force the
Iranians into direct negotiations, and pull off a better agreement than Obama did.”
Source: Investment Strategy Group, Ian Bremmer, “EG Update,” Eurasia Group, May 20, 2019. Emphasis added.
5
What is the Impact of Other Countries’ Interests in
the Region?
Investment
Management
Division
Source: Investment Strategy Group.
6
Recent Attacks Put the US on High Alert
Investment
Management
Division
1. Saudi Oil Tanker Al Marzoqah, Damaged in Reported Act of Sabotage 2. Saudi Arabia Major Oil and Natural Gas Infrastructure
East-West
Pipeline
• May 12: 3-4 oil tankers are reportedly damaged in a “sabotage” attack off the coast of the UAE
• May 14: Houthi rebels use drones to attack Saudi oil pumping stations on the East-West Pipeline
• May 19: A rocket is fired into Baghdad’s Green Zone less than a mile from the US embassy
• May 21: A Houthi drone attacks the Najran airport in southern Saudi Arabia
Source: Investment Strategy Group, Reuters, EIA, New York Times.
7
Iran Threatens to Close the Strait of Hormuz
Investment
Management
Division
Strait of Hormuz: April 2019 Crude Oil Production Per Country and Export Flows
• A third of world’s LNG and a fifth of global oil production goes through the Strait of Hormuz.
• “Iran relies on the Strait not only for its oil exports, but also for the imports of some needed food and medical products.” 1
(1) Michael Ratner, “Iran’s Threats, the Strait of Hormuz, and Oil Markets: In Brief,” Congressional Research Service, August 6, 2018.
Source: Investment Strategy Group, Goldman Sachs Enterprise Risk Management, EIA, Bloomberg.
8
kg
kg
Iran Set to Restart its Nuclear Program
Investment
Management
Division
10,000
9,000
8,000
7,000
6,000
Iranian Enriched Uranium Stockpiles
5% Enriched 20% Enriched (Right)
400
350
300
250
5,000
4,000
3,000
2,000
1,000
0
200
150
100
50
0
• A key criterion in the development of the Joint Comprehensive Plan of Action (JCPOA) is the time Iran needs to
produce enough weapon-grade uranium for a nuclear weapon, called breakout time. Iran agreed to refine uranium to
no more than 3.7% enrichment and eliminated its stocks of weapons-grade 20%-enriched uranium.
• On May 8 th , President Rouhani announced a series of steps to resume the production of nuclear centrifuges and the
accumulation of nuclear material within 60 days.
Source: Investment Strategy Group, Arms Control Association, International Atomic Energy Agency, JCPOA, Bloomberg.
9
Annualized %
% YoY
Iranian Economy Hit Hard by Sanctions
Investment
Management
Division
1. Iran Annualized Real GDP Growth and Inflation 1 2. Iranian Rial (Mid) to USD – Unofficial Market Rate
15
Real GDP Growth
CPI % YoY (Right)
60
200,000
51
180,000
10
40
160,000
IRR Weaker
140,000
5
20
120,000
0
0
100,000
80,000
5/8/18
US announces
JCPOA withdrawal
-5
-20
60,000
-6.0
-10
-7.7
-40
40,000
20,000
-15
2012 2013 2014 2015 2016 2017 2018 2019E
-60
0
Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 Nov-18
• The IMF forecasts that Iranian real GDP growth in 2019 will be the weakest since 2012 at -6%, even as annualized inflation
is running at around 50%.
• The Iranian rial is trading near its all-time low against the US dollar, according to unofficial market rates. Since the end of
2017 the rial has depreciated by roughly -70%, compared to a -45% peak devaluation for the Turkish lira in 2018.
(1) 2019 inflation as of April 2019.
Source: Investment Strategy Group, IMF, Statistical Center of Iran, Haver, Bonbast, Bloomberg.
10
US Military Signals Readiness to Respond
Investment
Management
Division
Abraham Lincoln Carrier Strike Group and Kearsarge Amphibious Ready Group – May 17, 2019
• The US deployed the USS Abraham Lincoln Carrier Strike Group and a bomber task force to the Middle East in early
May in response to intelligence regarding Iranian military activity.
Source: Investment Strategy Group, navy.mil, New York Times.
11
Percent of Respondents
1969
1971
1973
1976
1981
1982
1983
1985
1986
1987
1990
1993
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Cost of US Wars
Investment
Management
Division
1. Military Cost and Casualties of Recent US Conflicts
2. Gallup Poll: “Do you think the US is spending too little, about the right
amount or too much on national defense and military purposes?”
Casualties (Thousand)**
60
Too little About right Too much
Conflict
Military
Cost ($bn)*
Years of US
Involvement
Deaths
Non-Mortal
Woundings
Total
Vietnam 821 17.4 58 153 212
Persian Gulf 113 0.6 0 0 1
Iraq 822 8.8 4 32 36
Afghanistan 975 17.4 2 20 22
Syria 54 4.7 0 0 0
50
40
30
20
43
29
25
10
0
• Total costs of the war on terror for the US (including wars in Iraq, Afghanistan, and Syria), are estimated to be $5.9 trillion.
• Over 40% of Americans think the US is spending the right amount on national defense, the highest level in 15 years, but
would there be appetite for yet another costly military incursion into the Middle East?
*Costs of military operations only. Iraq & Afghanistan costs based on all overseas contingency operations as of 2018; all other estimates based on 2010 CRS report scaled by US CPI
through 2018. **Deaths: Battle and other in the theater.
Source: Investment Strategy Group, Congressional Research Service, "Costs of Major US Wars," June 29, 2010; Department of Defense Casualty Status; Department of Veterans Affairs;
Watson Institute at Brown University, Gallup, New York Times.
12
Million b/d
Iranian Oil Production Has Plummeted
Investment
Management
Division
Iranian Oil Production and Exports (Million Barrels/Day)
5.0
Production
Exports (3-Month Moving Average)
4.5
4.0
Jan-12
EU agrees to ban
Iranian oil imports
3.8
May-18
US Withdraws
from JCPOA
3.5
3.0
2.5
Jul-12
Ban imposed
by US and allies
goes into effect
Jul-15
JCPOA Signed
Nov-18
US sanctions
go into effect
2.6
2.6
2.0
1.5
1.0
0.5
Latest:
0.5
0.9
0.0
2011 2012 2013 2014 2015 2016 2017 2018 2019
• Since the US withdrew from the JCPOA in May 2018:
– Iranian oil production has fallen by 1.2 million b/d
– Exports have fallen from 2.6 million b/d to 0.5 million b/d month-to-date in May (0.9 million b/d on a 3-month
moving average)
• Iran will continue to send a few hundred thousand b/d of oil exports despite harsh US secondary sanctions.
Source: Investment Strategy Group, Bloomberg, cFlow Data (Platts Global Crude).
13
Million b/d
Million b/d
Million b/d
Spare Oil Production Capacity Looks Adequate
Investment
Management
Division
1. US Crude Oil Production
2. Spare Capacity from April 2019 Production Level to 2018 Highest
Production Levels
2.5
Y/Y US crude production (LHS)
US crude production (RHS)
13
1.40
1.3
2.0
12
1.20
1.5
11
1.3
1.00
1.0
10
0.80
0.5
9
-
8.6
(Sep 2016)
8
0.60
(0.5)
7
0.40
(1.0)
6
0.20
0.1 0.1
0.2
(1.5)
Jan-13 Aug-13 Mar-14 Oct-14 May-15 Dec-15 Jul-16 Feb-17 Sep-17 Apr-18 Nov-18
5
0.00
Iraq Kuwait Saudi UAE
• US oil production growth has matched or exceeded global demand growth over the past year, providing ample supplies
to the market.
• In fact, OPEC had to cut production in late 2018 in order to reduce oversupply and arrest a fast decline in oil prices.
• OPEC production could be increased back to 2018 highs if the market faced a shortage. Doing so would add 1.7 million
b/d from main Middle Eastern OPEC members – more than Iran’s current export levels of around 0.5 million b/d.
Source: Investment Strategy Group, EIA, Bloomberg, OPEC.
14
Days of OECD demand
Billion Barrels
Barrels per $1,000 GDP
Risks of an Oil Shock Look Contained
Investment
Management
Division
1. OECD Inventories – Adjusted for Days of Demand
2. World Oil Demand and Oil Demand Intensity per Unit of Global GDP
69
67
2010-2014 range Actual 2010-19
67.0
40
35
0.9
World Oil Demand
Oil Intensity (RHS)
36
1.00
65
30
0.75
63
25
61
60.3
20
0.50
59
0.4
57
15
55
55.7
10
0.25
53
5
51
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
0
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
0.00
• Global oil inventories look adequate, with OECD inventories still well above historical norms.
• The US could release oil from its Strategic Petroleum Reserve if needed.
• Oil consumption represents a much smaller share of the economy than in the late 1970s and early 1980s.
Source: Investment Strategy Group, IEA, World Bank, BP Statistical Review.
15
Key Takeaways
Investment
Management
Division
• The immediate threat of military engagement between the US and Iran has eased but risk of escalation
or miscalculation is high.
• US agenda (and the impact of Saudi Arabia and Israel) is unclear, with administration officials offering
contradictory views.
• Iran is set to resume its nuclear program with the intent of gaining leverage for future negotiations
which it previously relinquished as part of the JCPOA.
• There is further potential downside for Iranian oil production and exports, but ample OECD
inventories, growing US production, and OPEC spare capacity would help contain any short-term oil
price shock.
• We continue to recommend that clients stay invested at their full strategic asset allocation given
today’s macroeconomic backdrop and low odds of a recession, but we remain vigilant about the risks
to our outlook.
Source: Investment Strategy Group.
16
Investment Management Division
Disclosures
Important Information – Investment Risks
Investment
Management
Division
Risks vary by the type of investment. For example, investments that involve futures, equity swaps, and other derivatives, as well as non-investment grade
securities, give rise to substantial risk and are not available to or suitable for all investors. We have described some of the risks associated with certain
investments below. Additional information regarding risks may be available in the materials provided in connection with specific investments. You should not