Predictable Surprises:
Oil Markets & Iran’s Nuclear Programme The Iranian nuclear programme may eventually lead to a military confrontation with unpredictable results for all parties involved ... and beyond.
By Carlos Blanco
DESPITE THE CONTINUOUS denial of Iranian officials that their intent is to produce a nuclear weapon, very few people outside Iran believe them. Even Russia, one of Iran’s strongest allies, recently voiced public concerns about Iran’s intentions when Vladimir Putin stated that, “We’re not interested in Iran becoming a nuclear power. It would lead to greater risks to international stability.” The US and Europe are pursuing the diplomatic
route and applying additional pressure by strengthening the economic sanctions against Iran and their trade partners. However, many of Israel’s top national-security advisors are strongly supportive of a pre-emptive air strike before Iran enters the ‘zone of immunity’ in which they would be able to produce nuclear fuel in facilities that
US$/bbl 150
Figure 1: Spot Price WTI / Brent & Volatilities (6-month window)
Brent WTI
120
Israeli bombs could not reach. The International Atomic Energy Agency issued a report late February stating that over the past three months, Iran had tripled its production capacity for a more purified type of fuel that is far closer to what is needed to make the core of a nuclear weapon. The fuel is produced at Fordow, a facility built under 250 of granite. Growing worries about Iran are one of the
main drivers behind the run up in oil prices. Iran produces less than 4 million barrels per day, or around 4% of the world’s production. More importantly, approximately 80% of Persian Gulf oil is exported through the Strait of Hormuz. Iran’s leaders have repeatedly threatened closing the Strait if their nuclear facilities are attacked. The Iranian Revolutionary Guard continues to conduct naval manoeuvres in the Strait, whilst the United States (and others) have reinforced their military presence in the region. Vitol Chief Executive Ian Taylor recently
90 60 Jan 10 40% 30% 20% 10% 0 10% Jan 10 Jul 10 Jan 11 Source: NQuantX Global Commodity Workbench Jul 11 Jan 12
Brent Volatility WTI Volatility
Brent Returns WTI Returns
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The situation is gradually evolving into a complex game of deceit, threats and ultimatums
Taylor also believes that Iran’s economic losses
from the sanctions are being offset by the higher oil revenues due to higher prices. “The Iranians now want the price as high as possible as they’ve got less volumes to sell. I reckon they are probably quite close to winning based on the numbers.” In the US, the Obama administration is trying
to avoid a situation where the country would be dragged into another war in the Middle East – especially in an election year. US Defense Secretary
32 March 2012
expressed his views that recent price increases are due to the higher likelihood of an Israeli air strike on Iran. “I used to think this would never happen but everyone you speak to says the Israelis will have a go at striking at Iranian nuclear sites,” Taylor said, adding, “The day that happens, you have to believe the Iranians throw a few mines in the Strait of Hormuz and for a few hours at least – or maybe more – I cannot see a scenario where prices would not be at that sort of level [$150 a barrel].”
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