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Wednesday 14 December 2011

IEA says more sanctions on Iran push crude prices higher

IEA says more sanctions on Iran push crude prices higher 
Tougher international sanctions on Iran would lead to higher global crude prices and a decrease in output capacity for OPEC’s second-largest oil producer, the International Energy Agency said.

The EU added 180 Iranian officials and companies to a blacklist earlier this month to intensify pressure on Iran, after the U.S. imposed stiffer penalties in November. The bloc is still discussing a possible halt to purchases of crude from Iran, the world’s third-largest oil exporter. 
“Given already very low European crude inventories, a spate of precautionary buying and escalating tensions surrounding the Iranian issue could sustain prompt prices at levels higher than otherwise, amid the growing concerns about the euro zone and weaker global economic activity for 2012,” the IEA said.

Additional sanctions on Iran would “likely” mean refiners in the Mediterranean region would have to pay higher prices for replacement crude from other producers such as Saudi Arabia, Iraq, Russia, the agency said.

“Saudi spare capacity may not be a precise match for the significant volumes of Iranian Heavy crude involved,” it said of the oil grade. Mediterranean refiners have started “to enquire about extra cargoes of Arab Light, the closest quality match for Iranian Heavy, although much of current Saudi spare capacity may instead be held in the form of less suitable Arab Medium or Arab Heavy,” it said.

Oil is Iran’s main source of income, supplying more than 50 percent of the national budget, according to International Monetary Fund figures. Iran pumped an average of 3.6 million barrels a day last month.

Last week New York-based analyst Helina Croft said European refiners in the Mediterranean would be hardest hit by an increase in sanctions against Iran.

"In terms of supply-demand balances for the oil market, an oil embargo or sanctions on the Iranian central bank would essentially lead to a dislocation in trade flows, rather than lost outright production... However, the effect on oil prices could be significantly different’, he added.

Croft said increased sanctions from the U.S. and European Union targeting Iran's oil sector and central bank would likely, initially, have the primary effect of driving its oil exports east to Asia.

"If EU sanctions on Iranian oil were aimed at significantly reducing the flow of revenues to Tehran, they would perhaps seem no more likely to be successful than U.S. sanctions have been since 1988," the note said.

"An inevitable knock-on effect of an EU embargo would be to push more Iranian oil eastward, without removing Iran's ability to market all its crude available to export. In other words, the concentration of Iran's buyers would increase, but the total volume would not be affected."

Croft and Sen argued European refiners in the Mediterranean would be hardest hit by an increase in sanctions as they would be forced to scramble to find alternative sources of crude. Greece, in particular, has found the National Iranian Oil Company (NIOC) one of the few suppliers willing to provide it with crude on "open credit".

(Source: Bloomberg)

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