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Iran, Economy Threaten Higher Oil Prices

Thursday, 23 February 2012 | 00:00
Rising tensions around Iran’s nuclear program, coupled with prospects for a better global economy, carried oil prices above $106 Tuesday for the first time since May.
Analysts say oil could continue to rise, but how much depends on a variety of factors, including whether the sanctions against Iran result in supply shortages, which are as yet not a concern. The April contract for West Texas intermediate was above $106 in late trading, and Brent crude, the international oil benchmark, was above $121 per barrel.
China’s announcement over the weekend that it would reduce reserve requirements for banks in a bid to spur lending gave a boost to risk assets, including oil, as investors see a new round of easier policy. Also helping was the euro zone agreement to fund another bailout for Greece, removing the potential of a Greek default for now.
At the same time, Iran this past weekend said it would cut off oil supplies to France and Britain. The two countries were already cutting back, and Europe has vowed to end all existing supply contracts by July. The European embargo prohibits any new contracts with Iran.
“The oil market has been balancing downside demand risk from Europe against downside supply risk from Iran. The Greek deal over the weekend eased some of the demand-side fears while saber rattling from Tehran has kept supply-side concerns front and center. And oil prices have surged as a result,” notes Trevor Houser, partner with the Rhodium Group.
Rising oil prices also run the risk of bringing about their own decline. Analysts say at about $4 a gallon, consumers will cut back as much as possible on gasoline purchases. Gasoline use has been in decline, and was already down a surprising 8 percent last week.
The national average for unleaded regular Tuesday was $3.57 per gallon, according to AAA, and analysts expect to see gasoline at $4 and some even see $5, heading into the summer driving season.
Even without Iran, Houser said he has been expecting higher oil prices as Europe moves past Greece and China’s economy outperforms some reduced expectations. “We’re more bullish on the euro zone and Chinese growth and have been for the past six months, and we see higher oil prices even in the absence of Iran,” he said.
The question, however, is whether gasoline prices spike to a point where they wound the consumer. “At $4 a gallon is really where you see demand take a hit. The big concern is whether a nascent U.S. recovery is kneecapped in the summer by gasoline prices,” Houser said.
But with Iran as an unknown, the oil market has been rising, and traders have been betting prices will be even higher as the year goes on. “It looks as if the market has broken out pretty strongly here,” said Gene McGillian, analyst with Tradition Energy. “You have to immediately think, if things keep dovetailing on the positive side, we could push to the area where we topped out last year — at around $114,” said McGillian. He said there could first be resistance at about $110 per barrel.
“I know there seems to be some supply concerns after Tehran said they going to stop selling the British and French, but I don’t think they were selling too much there anyway,” said McGillian.
John Kilduff of Again Capital said the market is factoring bigger increases into the second half of the year. “You’re seeing anywhere from $125 to $200, but mostly it’s clustered around $125 to $150 (per barrel) in the calls,” he said.
Another factor traders are watching is the visit to Iran by representatives of the International Atomic Energy Agency, planned for Tuesday.
“There could be another leg higher for crude. It depends on what happens with the IAEA inspectors. If they leave in any kind of diplomatic huff that would be good for several dollars higher,” Kilduff said. It was an IAEA report in November that was the catalyst for the latest round of Western governments’ sanctions. The report suggested Iran’s nuclear program was weapons oriented.
Adding to the tensions around Iran is rising speculation that Israel will take action on its own to stop Iran’s nuclear program. Gen. Martin Dempsey, chairman of the U.S. Joint Chiefs, said this weekend that such an air strike by Israel was “not prudent” and would be “destabilizing.”
The U.S. has also warned Iran about its threats to close the Strait of Hormuz, a shipping route that carries about 20 percent of the world’s oil.
McGillian said, when it comes to Iran, the question is how much more oil can Saudi Arabia add to the market. “The Saudis have been reassuring the market they have spare capacity they can bring on line. I think that’s what people are watching for. Is there spare supply from Saudi Arabia?” he said.
Under the U.S. sanctions, financial institutions that deal with the Iranian central bank would be prohibited from dealing with the U.S. financial system. That would impact Japan and Korea, which traders believe are already finding other sources. Analysts said a big unknown is what India and China might ultimately do about importing Iranian crude.
“You’ve got players like India and China taking a wait and see approach about making a decision on whether to increase Iranian supply,” said Houser.
Source: CNBC
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