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Iran and its oil

Iran and its oil

The US and Europe are getting tough with Iran. But what will stringent new sanctions against a major oil country mean for the industry and the region?

July 20, 2010 4:34 by



WILL THE SANCTIONS AFFECT INTERNATIONAL OIL PRICES?

No-one expects Iran to hold back supplies to the international community in the near future, especially as the oil market is well-supplied and can absorb some disruption.

However, the new sanctions could make its own fuel supplies more expensive as it is forced to pay a premium to a smaller pool of suppliers, while any surplus Iranian crude, struggling to find a buyer, could add to volatility.

“If Iran builds up storage and then sells a large chunk, supply will come in waves. This could add price volatility,” said Lawrence Eagles of JP Morgan.

The accumulation of Iranian crude in vessels floating at sea periodically builds up in part because of seasonal factors (it tends to be the kind of heavy crude that is favored for winter heating fuel).

An increase in Iranian barrels at sea can widen a contango structure in the oil market, whereby the crude for near-term delivery is relatively cheap, and increase the cost of shipping if it commandeers many vessels.

“The contango is related to the cost of storage [which includes freight]. Iranian sanctions could affect the contango if they lead to inventory build up that causes shipping rates to go higher,” said Eagles.

For oil prices, there is also a long-term impact as the new sanctions compound the effect of years of restricted development, punishing not just for Iran, but for an international community that ultimately could face higher oil prices.

“The Iranian oil and gas industry has systemic problems, which has an impact for the long term,” said Ciszuk.



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