EU sanctions on Iran risk oil price hike

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Iran faces oil export loses after the EU sanctions entered into full force on Sunday, pushing up oil prices as some exemptions on  contracts and insurance ended. There is also pressure on the Gulf nation to stop the nuclear-enrichment program.

The sanctions now restrict the supply of Iran after supply has been curbed from Libya and North Sea fields. Gordon Kwan, head of regional energy research at Mirae Asset Securities based in Hong Kong, expected Brent oil prices to soar in lieu of the sanctions. “The EU insurance ban on tankers carrying Iranian crude could drive up demand for Brent and Dubai crude,” he said.

Last month, the Brent oil prices fell below $90 which is now expected to rebound with the Iran embargo in effect and oil refinery workers on strike in Norway.

Impact

Iran is the second-biggest producer in OPEC after Saudi Arabia and produces about 3.3 million barrels a day. The full implementation of sanctions is likely to remove about 1 million barrels a day. Mohammad Ali Khatibi, Iran’s governor to OPEC, has warned the EU about “the consequences of politicising the market.”

The EU ban on insurance for ships carrying Iranian oil affects 95% of the world’s tankers because London-based International Group of P&I Clubs, which is adhering to the EU rule, insures them.

A survey of 42 analysts on 28 June revealed that 16 of them predicted crude futures will increase in the week starting Monday citing the new sanctions while 12 forecasted little change in prices and 14 expected a decline.

Mahmoud Bahmani, Iran’s central bank governor, said they are prepared to meet the sanctions and stressed about programmes to fight the sanctions and hostile policies.

“Nobody can be totally certain how it’s really going to affect the market.”  Torbjoern Kjus, an oil analyst at Oslo-based bank DnB ASA, said. “There’s probably been huge inventory builds in Iran, and this could pose a bearish effect for next year or the second half of this year if there is a resolution.”

Emergency Meeting

Iran has urged OPEC for an emergency meeting to address the group’s production in excess of its targeted 30 million barrels a day. Aaccording to data compiled by Bloomberg, the 12-member organisation, which decided on 14 June to retain its daily ceiling of 30 million barrels, produced about 1.6 million barrels more than that in May.

The EU agreed in January to ban oil imports from Iran, offering a five-month phase-in period for existing contracts to let member states find alternative supplies. In an effort to retain an important Asian customer, Iran offered to supply oil to South Korea using its own tankers.

Complementing the European sanctions, a US law enacted 31 December cuts off international banks from the US financial system if they settle oil trades with Iran. This rule gave importing nations, including China, India and Japan, until 28 June to show that they have reduced purchases of Iranian oil in order to qualify for exemptions.

Oil and its derivatives account for about 80% of Iran’s exports and about half of government revenue. The estimate for the country’s 2010 revenue from net oil export is $73 billion. Now with sanctions in force, the export is likely to decline by 20% and 30%.

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