Don’t be fooled by the cordial meeting between Saudi and Iranian officials on the sidelines of the recent Organization of the Petroleum Exporting Countries (OPEC) meeting in Vienna.
“It was an easy, friendly meeting. Don’t worry, they did not fight, and there was no blood,” a senior Saudi official joked after a meeting with the Iranians on Dec. 12.
While OPEC quickly agreed on 30 million barrels per day without much argument, the meeting belied the great tensions between the two rivals. Of course, the unacknowledged 900-pound camel in the room was a contingency plan if customers stopped buying 2.57 million barrels of Iranian oil exports and if a renewed wave of international sanctions kick in against the Islamic regime.
The U.S. Congress last week passed a defence bill that included provisions that would impose sanctions on foreign financial institutions that do business with Iran’s central bank, in an effort to strike Iran where it would truly hurt — its oil assets.
Despite long-standing U.S. sanctions, Iran’s oil revenue is expected to rise by a third this year to US$100-billion, according to energy consultants IHS CERA. If successful, the International Energy Agency expects an 890,000-bpd decline in Iranian oil production by 2016 as a direct result of the sanctions.
In January, the European Union is expected to impose an embargo on Iranian oil in response to a report by the International Atomic Energy Agency that said Tehran may have been working on an atomic bomb. The EU action was unavoidable, especially after Iranian protesters ransacked the British Embassy in Tehran, and Britain deported the Iranian ambassador.
This was just one of the many conflicts in which Iran has played a starring role during the past few months: Israel has threatened to attack Iran’s nuclear facilities after the IAEA report came out, and the Persian state has also earned the ire of the Saudis, who accuse it of inciting Shiaa citizens in the Kingdom and Bahrain and operating a spy ring in Kuwait. Meanwhile, the U.S. and Mexican authorities exposed a plot by Iranian spies to assassinate the Saudi ambassador to Washington.
Not surprisingly, oil prices have simmered on tensions in the Middle East despite prospects of an EU recession in 2012. Canadian Imperial Bank of Commerce, which has issued the most bullish crude forecast among major banks, expects Brent to average around US$123 in the new year, with U.S. crude closing its spread differential too.
“Geopolitics is an upside risk, but our US$123 forecast assumes what we already know.
However, if the Strait of Hormuz is impacted, all bets are off,” said Katherin Spector, energy analyst at CIBC.
The Strait of Hormuz is the narrow seaway through which oil is shipped not just from Iran but other Mideast states too. The London-based Centre For Global Energy Studies estimates 14% of global crude-oil production could be at risk if the vital waterway was to become unnavigable, “an event that would no doubt cause an immediate and severe spike in the price of oil in 2012.”
The result could be catastrophic. Oil prices could jump US$23 a barrel in the first few weeks of the conflict and by a jaw-dropping US$175 if it persists, according to a survey of energy traders by Rapidan Group, a Washington-based consultancy.
With Iran’s customer base potentially disappearing, JPMorgan Chase & Co. fears the country may try to shock the global economy by cutting off oil supplies altogether.
“If Iran sees a loss of income as inevitable, there is a greater risk that it takes what limited political and economic capital it has to the negotiating table by invoking a pre-emptive export ban,” said Lawrence Eagles, an analyst at JPMorgan.
Most analysts contend, however, that neither Israel nor the U.S. has the appetite to launch military action. But the world’s dependence on Iranian oil has led many analyst skeptical of water-tight sanctions on Tehran either.
Some of the engines of global growth depend on Iranian oil: 6% of Chinese oil imports come from Iran, 9% of India’s and 10% of South Korea’s. In addition, Iranian oil makes up 30% of all Greek oil imports and 7% of Japan’s.
“The EU sanctions are not a done deal,” says Ms. Spector of CIBC, adding that apart from Europe, Iran’s key Asian clients such as Japan obsess too much about energy security to cut off Iranian supplies.
The Greeks have raised doubts about an EU oil ban, while Japan and South Korea are reportedly seeking a possible waiver to U.S. legislation. Meanwhile, China could exploit the situation to demand better pricing for Iranian oil.
Not surprsingly, while most analysts see Iran as an “upside risk,” most believe the global oil market will continue to meander.
“The key upside risk is supply disruption from Iran, or an anticipation thereof, which would add a risk premium to the price. In our forecast we assume that the current level of tension rumbles on without solution, but also without escalating,” says Helen Henton, an analyst at Standard Chartered Bank.
Financial Post
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