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Ashim Midha : 2012: Iran and the oil markets


 

 

Over the past several months, many efforts have been undertaken to limit the flow of payment to Iran with regard to oil exports. As the commodity is Iran's primary export, many nations believe that it uses the oil trade to fund development of its nuclear program.

In fact, the U.S. Senate passed the Menendez-Kirk agreement in early December by a vote of 100-0 in order to implement stricter sanctions on Iran's central bank and financial institutions involved in Iranian oil transactions.

After the House of Representatives also passed it, the Obama administration decided to veto the restrictions, perhaps concerned with the economic and political effect of such a stringent decision. Discussions over the past few days, however, suggest a push by the administration to convince buyers of Iranian oil, such as Japan, to decrease dependence on the source.

The European Union decided to freeze assets and imposed travel bans on several individuals suspected of having ties to Iran's nuclear program. India also attempted to blockade the payment clearing system during the summer and early fall, but this effort fell short of their initial expectations. Read Minyanville's “How America's Sanctions Against Iran Affected Indian Oil Companies.”

Ramin Mehmanparast, a spokesman for Iran's Foreign Ministry, predicts that sanctions would result in prices close to $250 per barrel. His forecast may be a bit exaggerated, but a sharp uptick is most certainly plausible. Iran exports a net 2.5 million barrels-per-day (bpd), and its 151 million barrels of proven reserves ranks third among OPEC nations.

With average world daily consumption of oil perched at 87 million bpd, obstructing Iranian exports would unquestionably tighten supplies, as production in the country constitutes almost 4% of world demand. Iran's oil minister, Rostam Qasemi, has made a series of statements over the past month that promote his country's indispensable position in the market, claiming that Saudi Arabia would be unable to fill the gap resulting from an obstruction of exports.

Especially at a time when global markets are on thin ice, embargoes and sanctions must be considered with great care. Taking into account the North Sea exploration and production issues in addition to declining inventory numbers in Europe and the United States, a supply shock could have severe implications.

Current figures place inventories at 56 days worth of demand in OECD countries. In the Energy Information Administration's data released Wednesday, crude oil inventories fell 7.3 million barrels more than predicted, down to a three-year low of 330 million barrels. A surprise 400,000-barrel draw in gasoline stocks also plays a part in confirming the supply downtrend as of late. Such developments may not prove to be a satisfactory cushion in a tight supply scenario.

The Vienna OPEC Conference nine days ago brought agreement upon a 30 million bpd figure for production. During the past month, Saudi Arabia has produced approximately one-third of this total. One caveat to this figure is that individual quotas were not established; thus, as Libya and Iraq ramp up their efforts, other member nations will be required to decrease production to keep in line with the aggregate number.

Total S.A. TOT +0.15%  foresees Libyan production to soon increase to 1.6 million bpd from the current 1 million amount. The next OPEC conference is scheduled for June 14 — the entity's secretary general, Abdullah al-Badri, believes that this meeting will bring debate and decisions concerning individual member nation production quotas.

In addition to the OPEC news, let's not forget to factor in the elephant in the room. It isn't too often that the crude oil and nuclear power topics come together, but with Tehran's invite to the IAEA to visit its nuclear facility in January, this is exactly what will occur. Iran claims that its use of enriched uranium is not for the purpose of developing nuclear weapons but rather for diversifying its generation capacity; a great excuse, especially as oil is significantly more expensive as an input to electricity generation than most other sources of energy.

One effect on the oil market hinges on the IAEA's observations regarding the legitimacy of the nuclear program. Perhaps more significant is Israel's reaction to the report — in the past few weeks, it has called on the United States to consider the possibility of a military strike. After two unexplainable explosions, one at an Iranian missile-testing site near Tehran in mid-November and another near nuclear sites in Isfahan later in the month, tensions continue to escalate.

In 2011, the oil markets were defined by Libya, the Brent-WTI spread, and shifts in the United States' pipeline paradigm. Could 2012 shape up to resemble the developments of 2003 — out of Iraq and into Iran?


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Ashim Midha is a student at the Wharton School of the University of Pennsylvania where he is majoring in Finance. is also a Minyanville contributor. ( Minyanville Media, Inc. (MMI) is an Emmy Award winning content and community platform ). Petroleumworld does not necessarily share these views.


Editor's Note:
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Petroleumworld News 12/28/2011

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