Oil’s recent surge may sink in sands
TRADERS looking at the recent actions of the theocracy of Iran – which confirmed its ban on the sale of crude oil to the UK and France on Sunday – might be forgiven for assuming that the escalating tensions between it and the West are going to be the biggest factor impacting the price of Texas light sweet and Brent crude oil. However, though war isn’t out of the question, it’s far from inevitable and the global slowdown and Eurozone crisis could leave those long on black gold not looking too slick.
A STORM IN AN OIL DRUM
Julian Jessop, chief global economist at Capital Economics, thinks although markets have interpreted recent events as bullish for oil prices, “Iran’s position looks increasingly weak and the regime may now be close to backing down.” Edward Bell, an economist at the Economist Intelligence Unit, says “the Islamic Republic has little room to manoeuvre as sanctions cut deeper.” Bell points out that exports to both the UK and France only accounted for 60,000 barrels per day in the first half of 2011 – less 3 per cent of Iran’s total exports of crude. He think that if Iran really had wanted to make a retaliatory statement to the EU over its own ban on imports of Iranian oil, it could have stopped shipments to Greece, Italy and Spain: the largest consumers of Iranian crude.
Jessop describes Iran’s banning of exports to the UK and France as “essentially an empty gesture”. He also notes that even if Iran does pre-empt the EU embargo by stopping sales to other European countries, the fragility of their economies means that they may well need less oil anyway: “Indeed, EU consumption of oil has fallen outright in each of the last five years.” He believes “the impact of the Iranian ban may simply be to ensure that more of the burden of weaker demand is felt by Iran than by other oil exporters.”
As the fuel that powers the engines of global growth, even if oil continues to rise in the short term it would upset any recovery in the medium term. Chris Beauchamp of IG Index notes “a surge in the price of black gold could be just the thing to disrupt the rally.” In turn, this would bring down the price of oil as the engines stutter again.
EVENTS MY BOY
Traders need to keep an eye on the International Atomic Energy Agency’s (IAEA) visit to Iran and its upcoming report in March. Bell says “any statement that highlights Iran had been pursuing nuclear weapons at some point will raise tensions in the region and shift prices upward.” On the other hand, as it did with Libya, the International Energy Agency (IEA) may once more release oil to offset reduced supplies. Events could easily slip traders up.