Tensions in Iran: Oil's not well

Last week, the markets covered some lost ground and posted a healthy performance, much to the satisfaction of investors. Some positive news flows from the global front was cited as the key reasons for such a positive trigger. First, it was the decision taken by the Fed and 5 other central banks to cut the cost of emergency dollar funding to European banks. The second factor was China's move to cut back CRR by 50 bps, which managed to fuel a rally world over.

However, the overall global picture is far from the road to recovery. While there were finally some minute, yet visible, signs of easing tensions in the troubled Euro-zone, fresh concerns that flagged off from the Middle East, with Iran at the helm, have bought the world economy on the brink of yet another 'war for oil' situation.

As per media reports, Iran’s flamboyant nuclear power-house ambitions have sparked of some high-intensity geopolitical tensions against the western powers, the US and the EU.

In recent developments, it has come to light that the US took aim at Iran in an effort to choke off oil exports, while the EU stopped short of targeting crude, as it tightened sanctions intended at curbing Iran’s nuclear program. On Dec 2, 2011, the US senate unanimously passed a bill endowing their President with powers to bar foreign financial institutions engaged in business with Iran’s central bank from having correspondent bank accounts in the US. If such a bill is enacted, it would cause serious trouble for foreign companies to pay for Iranian oil imports.

In Europe, amidst the nations' very own sovereign debt battle, a group of EU ministers who met at Brussels added 180 Iranian officials and companies to their sanctions list, and started work on restrictive measures against Iran’s oil exports, banks, transportation and the Revolutionary Guard Corps. In staunch protest of such a move, the UK embassy in Iran's capital city, Tehran, was ambushed by Iranian protesters, who ransacked the embassy compound for hours. According to some unconfirmed reports it is believed that a bomb had been set-off outside the UK embassy compound in Bahrain, which experts believe, will further fuel the issues between Iran and the western powers.

These developments have sparked off a spurt in crude oil prices, which has, in turn, seen the Nymex Futures rise by 5% within a week, to US$ 101.34 per barrel. Moreover, an unexpected drop in unemployment data from the US also supported the rally in oil prices. There are growing fears worldwide, that the soaring crude oil prices sparked off by the Iranian tensions will have a widespread impact on an already fragile economic scenario. In fact, the Govt. of Iran has also stated openly in the press that any move to block its oil exports would increase the the crude prices by more than double to US$ 250 per barrel, with devastating consequences. 

According to Bloomberg data, in the last month, Iran pumped 3.56 million barrels of oil a day, as compared to Saudi Arabia’s 9.55 million barrels a day, and was the top producer in the OPEC. Iran is the 2nd-largest oil supplier in the OPEC, earning US$ 56 billion dollars in the first 7 months of 2011. Accounting for almost 10% of the global oil reserves and 15% of natural gas reserves, one can only imagine the impact the recent events would have on the crude oil price movement.

On the Indian front, we believe that our imports will get costlier with the combined effect of this spurt in crude oil prices and a weak rupee, as imports contribute around 70% of our total crude oil requirement. While this might improve the realisations of the upstream majors, this will be negated by the end of the year as a result of the rising subsidy bill issue. In case of the OMCs, it seems quite likely that they may have to undertake a fresh round of price hikes to stay afloat in this crisis.