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How Turkey's Current Problems Could Benefit Iranian Oil

By Ellen R. Wald, Ph.D.CommoditiesAug 15, 2018 07:13AM ET
www.investing.com/analysis/turkeys-current-problems-could-benefit-iranian-oil-when-sanctions-take-effect-200338721
How Turkey's Current Problems Could Benefit Iranian Oil
By Ellen R. Wald, Ph.D.   |  Aug 15, 2018 07:13AM ET
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As most everyone knows by now, the Turkish lira is struggling. On Monday, its value dropped to more than 7 lira to the dollar before rebounding slightly. If Turkey’s currency issues continue, there could have far reaching implications for oil markets—particularly when the US sanctions against the Iranian oil industry take effect in November.

Turkey is a major importer of Iranian oil and gas. Indeed, just over 50% of Turkey’s crude oil and condensate imports in the first quarter of 2018 were imported from Iran. Turkey also has a natural gas contract with Iran that runs through 2026. As well, Iran supplies Turkey with about 9.5 billion cubic meters of natural gas that Turkey relies on to produce electricity.

As the value of Turkey’s lira drops, it becomes more difficult for Turkey to purchase resources globally—including oil and gas. Turkey does not produce much of its own oil and gas but is a major consumer of these resources. The sinking value of the lira means that Turkey is desperate to buy cheap oil and gas without the need to exchange its currency at inferior rates. Meanwhile, Iran is desperate to sell its oil and gas for any currency that it can use.

Though US sanctions on Iran's oil and gas industry go into effect in November, Iran is already losing customers. Iran is in a difficult situation—its government needs the cash that oil exports bring, but the sanctions prevent customers from doing business with Iran in US dollars, the typical currency for oil and gas trading. Other currencies like the euro will also be closed to Iran, because European banks will not want to risk secondary sanctions from the US for doing business with Iranian banks. Iran can accept other foreign currencies, such as the Chinese yuan, for its oil, but yuan will not help the Iranian government pay its bills except to Chinese contractors.

Turkey, however, is Iran’s geographical neighbor. The two countries share a border on Iran’s northwest and Turkey’s southeast. That area is largely inhabited by Kurds, an ethnically distinct population that spans several countries in the region including Turkey, Iran, Syria and Iraq. The plummeting value of the lira makes Iranian oil and gas even more attractive to Turkey, and Turkey is an attractive customer for Iran.

Iran could accept lira for its oil and gas and put that currency to use, particularly in the Turkish-Iranian borderland region. It's not uncommon for borderland communities to use multiple currencies. For example, Canadian currency often mixes with American currency in parts of northern New England. There are several Central American and Caribbean countries where US dollars are sometimes accepted.

Moreover, the Turkish government has been actively demonstrating its independence from US influence of late, detaining an American pastor and taking geopolitical stances that anger Washington. The United States has responded with sanctions, and Turkish president Erdogan has replied by calling on Turkish citizens to boycott US products like the iPhone (NASDAQ:AAPL). It would not be an unreasonable step for Turkish refineries and utilities to actively defy US sanctions on Iran by increasing their purchases of Iranian oil and gas.

As market watchers anticipate how much oil is about to come off the market from Iranian sanctions and how significantly this could cause oil prices to rise, Turkey is an important country to monitor. Rather than cutting imports from Iran, Turkey might even increase imports from their neighbor and pay in Turkish lira. This would mean less Iranian oil than expected will come off the market in November and in the months to follow.

How Turkey's Current Problems Could Benefit Iranian Oil
 
How Turkey's Current Problems Could Benefit Iranian Oil

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Do Deikins
DoRight Aug 15, 2018 11:07AM ET
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Yes, Iran would gladly accept the Lira for oil, but what will that do for the Lira?  BTW, The US dollar is the official currency of El Salvador and Ecuador.
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Colleen Voisin
Colleen Voisin Aug 15, 2018 11:07AM ET
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There doesn't seem to be "a good" set of choices.
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Aug 15, 2018 11:07AM ET
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Hi Hello how are you BTW Pakistan
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Colleen Voisin
Colleen Voisin Aug 15, 2018 10:51AM ET
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It occurred to me also, this step. Trump could start a war by that pressure.
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Dar Turtle
Dar Turtle Aug 15, 2018 7:55AM ET
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US will impose financial sanction on Iran. Effectively, cut off route for Iran to pay and receive US$. Therefore, doing business with Iran must be in other currencies. Iran wants to receive a currency:..1. Not subject to sanction --- EURO is in a tricky situation. Iran can only trade through banks without US presence..2. Can be used to buy what Iran want..Iran would have no problem to receive Chinese Yuan as it has to buy manufactured goods from China anyway. In term of Turkey Lira, it is questionable.
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Musa Us
Musa Us Aug 15, 2018 7:55AM ET
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I wouldnt rule out the fact that devaluation of lira will allow Turkish industries to become more competitive. Bilateral trade between the two countries have room for improvement. Nevertheless Chinese yuan will no doubt prove to be useful at any rate.
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