Oil hanging on Iranian geopolitical factors

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Logic will get you from A to B. Imagination will take you everywhere.

Albert Einstein

Iran, Iran and a little bit more Iran has been the main price driver pushing Brent and WTI price to the highest level since May of 2011 when the Libyan civil war was in full swing. Geopolitics drove prices higher in early 2011 and geopolitics are once again driving prices higher in 2012. Tensions rose again yesterday when Iran refused to let the UN IAEA inspectors visit Iran's nuclear sites resulting in this round of inspections and meetings to be deemed a failure. Certainly the actions by Iran yesterday raises concern that Iran has something to hide and what they are hiding might possibly be work toward developing nuclear weapons. The UN communiqué said that there was still no agreement on how to begin the clarification of unresolved issues in connection with Iran's nuclear program, particularly those relating to possible military dimensions. So the tensions continue to rise and the price of oil is continuing to follow higher with each event evolving from the region. Although there have been several conciliatory signals, like the Iranian letter calling for a meeting with the west, the situation between Iran and the west is not getting any better and in fact is deteriorating even further.

The US and European stance is to continue to allow sanctions to work...which they seem to be impacting Iran. That said even if Iran has lost sales of oil and its exports are down (difficult to get a number on this) the price of oil is clearly higher. Since the European's issued their embargo on Iranian crude oil purchases, the price of Brent has risen about $10/bbl and thus Iran's revenue stream is likely to be where it was before the embargo (assuming some lost crude oil sales) or possibly higher if their export volume is still holding. Thus the sanctions may not be having much of an impact on Iran at this point. That does now mean they will not have an impact. However, will the Israelis be willing to wait and see if the sanctions do impact Iran and ultimately serve to change their stance or will Israel's patience run out and result in military action. That is by far the biggest wildcard in this whole situation.

So far there is no shortage of oil from anything going on in the Middle East and all of the price gains can be categorized as a risk premium that is widening as the market views the situation as one that could eventually lead to a supply disruption. Certainly if there is military action taken by the Israeli's or preemptively by the Iranians' there will be a supply disruption that is difficult to quantify as well as to determine how long it would last. Simply put if that were the outcome the price of oil would surge to new all-time highs and likely exceed the highs made back in July of 2008. This scenario is the main risk in the oil market and a risk that would not only send oil prices surging but it would have a significant impact on the precarious growth rate of the global economy. Hopefully this is simply a scenario and not one that actually turns out to be a reality.

That all said even with a modest risk premium growing into the price of oil, it may not yet be impacting Iran but it is slowly starting to impact the consuming world economies as inflation risk is rising and the cost of doing business is rising every day. As oil prices continue to rise the likelihood of both the developed and emerging market economies will continue to slow down. Even without a military conflict in the Middle East rising tensions and thus rising oil prices are and will continue to have a negative impact on the global economy...that is the real risk at the moment.

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