Friday, March 2, 2012

>Crude Oil: Geopolitical tensions around Iran driving prices higher •

Oil prices have risen amidst increasing geopolitical tensions around Iran
Oil markets have increasingly focused on the escalating geopolitical tensions over the Middle East in general and Iran in particular. Iran is the second largest oil producer in OPEC, with an output of around 3.5 million barrels per day (mbpd), accounting for almost 4% of global oil production. In response to rising geopolitical concerns, the front-month Brent oil price has risen by around 12% in the month of February and hit a 9-month high of USD 125.55/bbl, while long speculative positions on oil have also increased. We had earlier highlighted the upside risks posed by geopolitical tensions to oil prices in our December report1.

The US, the European Union (EU) and Israel have been engaged in efforts to diplomatically isolate Iran over its alleged nuclear weapons program. The US recently imposed additional unilateral sanctions on Iran and froze Iranian Central Bank’s assets in the US. Earlier, US had classified the Central Bank of Iran (CBI) as a centre for money laundering, and also passed a law that would punish any foreign financial institution that did  business with the CBI. [For further details on Iran related sanctions, please refer to Appendix] Efforts have been stepped up to discourage countries from importing oil from Iran. Meanwhile, risks of a military conflict remain high-ranking US and Israeli officials repeatedly stressing that “all options remain on table”, an apparent allusion to military strike, in order to deal with Iran’s alleged nuclear weapons program. We attempt to briefly evaluate the risks to oil supply and energy security emanating from the current crisis over Iran.

Diplomatic efforts have increased to embargo Iranian oil out of world market
The EU on January 23rd agreed to halt oil imports from Iran from July onwards. Such an oil embargo will force EU to seek other sources of oil supply, and is likely to push up oil prices. The EU decision comes amidst increasing diplomatic pressure on Iran’s major trading partners – China, India, Japan and South Korea – to halt oil imports from the country and aid in its diplomatic isolation.

To read the full report: CRUDE OIL