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.
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