UAE can manage impact
Existing international sanctions on Iran may adversely impact bilateral trade with UAE, though the overall drag on growth is likely to be small and manageable. Iran accounts for 6 percent of total and 12 percent of non-hydrocarbon UAE exports, though over 90 percent of it represents re-exports. There is little evidence that UAE exports to Iran have been materially affected by sanctions imposed in June 2010 as these appear to have held up well in H1, 2011. Financial sanctions have been further tightened in 2011/12. It is difficult to quantify the impact of financial restrictions and obstacles in obtaining trade finance on existing Iranian businesses operating in Dubai. BofA Merrill Lynch said, in the worst case scenario where all exports to Iran stopped, UAE GDP would be reduced by just 1.4 percent (assuming 20 percent added value for re-exports), though the impact would be felt most in Dubai.
Hormuz strait
The threat of closure of the Hormuz strait is a clear negative to the GCC, though it is unlikely to materialize for now, the BofA Merrill Lynch report said. This would be because: 1) it is the main conduit of Iranian crude oil and would also hit Iran hard; 2) American military bases in the GCC would allow an effective response and consequently the strait might not be closed for long; 3) it would risk escalation into a broader military conflict; 4) among the main customers of Iranian oil who would suffer from oil disruptions are China and India, who provide Iran with a degree of international diplomatic support; and, 5) so far, Western powers seem to be preferring the route of tougher sanctions to bring back Iran to the negotiating table, which potentially buys time.
Conversely, the Hormuz closure threat keeps the bid on oil prices, at a time where financial sanctions, particularly against the Iranian Central Bank, may have forced Iran to sell its oil at a discount, while also attempt to push Western powers to back off from applying further pressure.
Should the Hormuz strait be closed however for a period of time, the GCC would suffer due to its geographical location. All of Qatar's hydrocarbon exports including LNG pass through the strait (apart from the Dolphin pipeline, but it represents less than 5 percent of its gas exports). The UAE is in a similar situation, as the pipeline it is building to bypass Hormuz would only be operational in the summer of 2012.
Saudi Arabia is in a "relatively" better shape, as it has in place the Yanbu terminal on the Red Sea with capacity of 4.5 million bpd compared to crude oil production of 9.6 million bpd in December.
Dubai
While sovereign wealth cushions, this tail risk has led to decent demand for CDS protection and hedging for exposure to external sovereign debt of GCC hydrocarbon producers. However, BofA Merrill Lynch said unlike current market pricing, a squeeze on oil income in the GCC would most harshly (indirectly) affect Dubai given its low level of savings, a leveraged banking sector and the resultant lower liquidity complicating the refinancing of the large maturities coming due in 2012.
Qatar
While BofA Merrill Lynch commodities team has sharply lowered its 2012 forecast for US natural gas prices and Henry Hub spot prices made new lows this month, the impact on Qatar would be limited at this stage. This has nevertheless taken place along the concurrent rise of geopolitical tensions, compounding the poor market sentiment. It is however important to note that a very small amount of Qatari LNG is actually sold on spot. LNG pricing for Qatar comes from LT contracts (55-60 percent of all contracts with duration of 20+ years) and the rest from ST contracts (1-3 years). Each contract is different and pricing varies. The LT sale and purchase agreements provide some certainty of volume offtake. Regarding pricing, the price agreements with Asian and European markets are generally linked to oil- hydrocarbon price index, allowing some fluctuations, while contracts for US markets are generally spot-based (thus potentially more volatile pricing).
As such, export revenues over the past few years have thus been resilient. This also reflects the fact that less than 5 percent of LNG exports from Qatar are destined to US markets (vast bulk is for Europe and Asia). Should spot price weakness however persist for a long time, this could impact the rollover contract pricing terms Qatar would negotiate, as well as industry-wide contract benchmarks, BofA Merrill Lynch said in its report.
