Iran Oil Premium Defies Analysts Rejecting Risk
Thursday, 16 February 2012 | 11:00
Traders are bidding up crude by as much as 15 percent on the assumption that conflict with Iran will lead to the biggest disruption to Gulf oil supplies since 1991. Analysts from Bank of America Corp. to IHS Jane's say those concerns are exaggerated.
Brent, the benchmark grade for more than half the world's oil, is trading for $5 to $15 a barrel more than it would without the standoff with Iran, according to Societe Generale SA, which says prices may jump to $200 should cargoes be interrupted. UBS AG, Switzerland's biggest bank, says the risk of a confrontation that would shut off shipments through the Persian Gulf has added about $10 to the price of crude.
"Oil's recent rally is overextended," said Olivier Jakob, managing director at Petromatrix GmbH, a Zug, Switzerland-based consultant that counts Total SA and Gunvor Group Ltd. among its clients. "The premium is at least $15, amid talk of Iran being proactive with an oil embargo" and a possible Israeli attack, Jakob, who recommends buying options that give traders the right to sell Brent, said in a Feb. 9 interview.
Brent has gained 13 percent since Dec. 14, the day after Iran, OPEC's second-biggest producer, said that it was planning military maneuvers in the Strait of Hormuz, the 34-kilometer- wide (21-mile wide) chokepoint through which about 20 percent of global crude supplies flow. The European Union last month announced a ban on Iran's oil imports by July 1 even after the nation's Vice President Mohammad Reza Rahimi threatened to close the strait should the 27-nation bloc go ahead with the embargo.
Contracts for March deliveries of Brent expired at $118.16 a barrel on the ICE Futures Europe exchange in London yesterday. April supplies rose today as much as 75 cents to $118.10. Prices are $11 higher than they would be without the tension over Iran, according to the average of 10 analysts and traders surveyed by Bloomberg. Estimates ranged from $5 to $15.
The standoff with Iran centers on the nation's nuclear program. In a November report, the International Atomic Energy Agency cited "credible" sources as saying the country has studied how to make a nuclear bomb. While Iran says the program is for peaceful purposes only, the IAEA says the country's facilities are dispersed over a wide area and some are underground. IAEA inspectors visited Iran for talks last month and are scheduled to return on Feb. 20-21.
"Iran may lash out from time to time if it feels pressured, but there won't be an oil spike this year," said Cliff Kupchan, an analyst at Eurasia Group in New York. "Iran isn't moving all its nuclear activity underground and its progress on the larger centrifuges isn't very good. Those are the two 'red-light' issues that can lead to an Israeli strike."
A closure of the Strait of Hormuz would be the biggest disruption to Gulf crude exports since Iraqi President Saddam Hussein ordered the invasion of Kuwait in August 1990, an event that all but shut off about 5 million barrels a day of supplies. West Texas Intermediate oil jumped 88 percent in the next two months. It tumbled 33 percent on the day the U.S.-led coalition began airstrikes against Iraq.
The tension in the Persian Gulf has increased as both the U.S. and Iran head toward elections. U.S. Defense Secretary Leon Panetta said this month Israel may attack Iran's nuclear facilities by mid-year, while Israeli Defense Minister Ehud Barak said Feb. 2 his country must consider conducting "an operation" before Iran reaches an "immunity zone" on its nuclear program. Iranian President Mahmoud Ahmadinejad said Feb. 11 that he will unveil a "major" nuclear development in the coming days, the state-run Press TV news channel reported.
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