Thursday, February 16, 2012

Iran Oil Premium Defies Analysts Rejecting Risk: Energy Markets

(Bloomberg) -- 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 14 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.

Iran Halts Exports

Iran halted crude exports to France and the Netherlands and threatened to stop shipments to four other European countries, state-run Mehr news agency reported, citing an unidentified official at the National Iranian Oil Co.

The EU has "no information at all" that Iran has acted unilaterally, Michael Mann, an EU spokesman, told reporters in Brussels. European governments already plan to make good any Iranian shortfalls by buying oil from other suppliers, Marlene Holzner, a spokeswoman for the bloc, said at the same briefing.

Brent for April delivery climbed $1.58, or 1.3 percent, to settle at $118.93 a barrel on the London-based ICE Futures Europe exchange. Prices are $11 more than they would be without the tension, according to the average estimate by 10 analysts and traders surveyed Feb. 8-14 by Bloomberg. Estimates ranged from $5 to $15.

Nuclear Bomb

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."

Iran is approaching the "hypothetical" nuclear capability to produce atomic weapons, making it necessary to reach an agreement through negotiations, Russia's Deputy Foreign Minister Sergei Ryabkov said. Russia sees no "firm" evidence that the Gulf state is seeking to acquire nuclear-weapons capability, he said in comments published on the ministry's website today.

The EU said in a statement today that it received a letter from Iran in response to a note in October from EU foreign policy chief Catherine Ashton regarding talks on the Gulf state's nuclear program and is consulting with its so-called E3+3 partners. The E3+3 partners are the U.S., Germany, France, Russia, the U.K. and China.

Biggest Disruption

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 following January.

"We view a blockade of the strait as a low probability given the serious economic damage it would have on Iran itself," Soozhana Choi, the Singapore-based head of Asian commodities research at Deutsche Bank AG, said in a report today. "The mere utterance of such a threat is a grave concern for the oil market given the strategic importance of the strait on a global scale," she said.

Tension in the 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.

Enriched Fuel

Iran loaded locally built fuel plates into its nuclear research reactor in Tehran, Press TV reported today, showing images of President Mahmoud Ahmadinejad inside the facility. Only a handful of countries, including France and the U.S., have the technology to build the 20 percent enriched fuel plates needed for the reactor, according to Iranian officials.

"Threats by Israel and Iran are particularly vociferous at the moment in the lead-up to elections," said David Hartwell, Middle East political analyst for London-based IHS Jane's, a unit of IHS Inc. "Israel's priority is to keep the Iran threat at the top of the agenda during an election year in the U.S. Iran's parliamentary elections in March explain the ratcheting up of boisterous nationalism such as closing the Strait. But that would be a last resort. It would have to feel it was under severe pressure."

Odds on Airstrike

The odds that either Israel or the U.S. will carry out an overt airstrike against Iran by Sept. 30 rose to almost 40 percent yesterday, according to, an online prediction market. They were 25 percent a week ago. The wagers are based on 413 bets, compared with more than 500,000 on the U.S. presidential election.

As the standoff deepens, China, the world's biggest energy user, is replacing Iranian crude imports with supplies from West Africa, according to Nordea Bank AB. The nation's first-quarter purchases from the Islamic republic may slow to half last year's average rate of 550,000 barrels a day, according to the International Energy Agency in Paris.

Japan, the second-biggest buyer of Iranian oil last year, is nearing a resolution with the U.S. administration over a law requiring countries to cut those imports or face restrictions in doing business in the U.S., Foreign Minister Koichiro Gemba said at a press conference today in Tokyo.

Bullish for Market

"The premium is a healthy $5 or more, and about $15 a barrel if you add China to the mix," said Jeremy Friesen, a commodity strategist at Societe Generale in Hong Kong. "OPEC spare capacity has probably shifted to Iran as the Chinese get oil from elsewhere, which is bullish for the market because spare capacity in Iran is actually supply off the market. Without that, you would see a much lower oil price to reflect the weak economy."

Prospects for war in the Gulf have dropped, according to Henry Smith, a London-based Middle East and North Africa analyst at Control Risks, which this week cut its forecast of an attack on Iran to a 25 percent chance, from 30 percent.

"Oil would spike dramatically if you cut off Hormuz, so you're looking at $100-plus on top of the price," said Francisco Blanch, New York-based head of commodities research for Bank of America. "But it has never happened."

--With assistance from Sherry Su in London, Ladane Nasseri in Dubai, Henry Meyer in Moscow, Grant Smith in London and Sachiko Sakamaki in Tokyo, Ewa Krukowska in Brussels. Editors: Raj Rajendran, Stephen Voss.

To contact the reporter on this story: Ayesha Daya in Dubai at

To contact the editor responsible for this story: Stephen Voss at

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