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Softening the blow? Why cheaper oil lessens the impact of the sanctions against Iran

oil

Rising global crude supplies and falling prices will cushion the impact on the global economy of unprecedented Western sanctions aimed at curbing Iran's nuclear programme

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June 9, 2012 10:03 by



With benchmark Brent crude traded just above $100 on Thursday, down from a high of over $128 in March, buying alternatives has become cheaper for Iran’s big oil buyers in Asia and elsewhere. Top oil exporter Saudi Arabia has boosted output to the highest level in decades to cool global oil prices and cover any supply disruption. “This is a very powerful flotilla of sanctions that are heading towards Iran, it’s never been this powerful,” Daniel Yergin, IHS CERA chairman and author of the pullitzer winning work “The Prize”, told Reuters.

“What makes a big difference is that there is alternative oil in the market. There is a very concerted effort to ensure that alternative supply that will come into the market to enable the sanctions to work.”

More supply was also coming from Iraq as international oil companies develop giant fields there and from Libya as the country recovers from civil war, he added.  Output from tight oilfields in the United States had also increased supply in the world’s top consumer by 600,000 to 700,000 barrels per day (bpd), he said, cutting import needs. Inventories in the United States recently hit their highest level since 1990.

Asian buyers of Iranian crude are running out of time to find ways around Western sanctions that aim to reduce oil revenues for the Islamic Republic. Iran exports most of its crude to China, Japan, India and South Korea, who have already cut purchases by about a fifth from the 1.45 million barrels per day they were buying a year ago.

Imports will fall even more if they fail to find a way around the biggest headache – an EU ban on insuring shipments of Iran’s oil. Still, lower oil prices will undermine the argument among consumers that the loss of Iranian crude could harm economic growth.

“Prices have come down and that really takes pressure off the economies and it’s helpful to economic growth and recovery,” Yergin said. The sanctions have pushed Iran to open talks with the West on its nuclear programme .

“This is really a very large chess game that’s been played out and Iran will have to decide, is there some point that they are willing to make a deal that will be satisfactory to the Western European countries and the United States on its nuclear programme?” Yergin said.

IRAN’S STOCKPILES RISE

Iran’s crude stockpile is on the rise as exports drop, Yergin said.

“We know that some of it is going into storage – several hundred thousand barrels a day,” Yergin said. Iran will be looking to sell its oil at steep discounts as the sanctions eat away at exports, he added.

Any resolution between the West and Iran over its nuclear programme would depress oil prices as Iran sells stored oil, force other producers to reduce output, he said.



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