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Iran Crisis 'Could
Drive Oil Over $90'

By Heather Stewart
Economics Correspondent
The Observer - UK
1-28-6
 
Oil markets are braced for a nail-biting week, as world leaders demand action against Iran over its nuclear ambitions, and analysts warn that crude prices could reach $90 a barrel if the oil-rich state retaliates by blocking supplies.
 
The International Atomic Energy Agency meets on Thursday to decide whether to refer Iran to the United Nations Security Council. Mahmoud Ahmadinejad, Iran's president, has threatened to respond to any punitive action by cutting off the 2.6 million barrels of oil a day it pumps into the markets - 5 per cent of the world's supply.
 
Jittery investors sent the price of Brent crude to $67.76 a barrel in New York on Friday night, as fears about the Iranian crisis and rebel attacks on oil facilities in Nigeria rocked confidence in an already tight market.
 
Kona Haque, commodities editor at the Economist Intelligence Unit, said the worst case scenario of a shutdown of supplies from Iran would be 'absolutely devastating ... I wouldn't be surprised to see the price go over $90 a barrel'. She said fears about Iran are already adding a $10 risk premium to oil prices, which could remain in place for months as the crisis escalates. Davoud Danesh-Jafari, Iran's oil minister, has warned that the result of punitive action against his country would be 'the unleashing of a crisis in the oil sector'.
 
'The resumption of nuclear research by Iran is currently the market's largest preoccupation,' said BNP Paribas oil analyst Eoin O'Callaghan. He has pushed up his forecast for average oil prices this year to $65 a barrel because of geopolitical risk. He points out that the oil price rose more than 60 per cent in the run-up to the Iraq war; a similar increase now would take prices to $94.
 
Haque said that with little spare capacity in the market, prices are much more vulnerable to political shocks: 'We need a lot more supply capacity to have a cushion; it's going to take another couple of years until that happens.'
 
The oil producers' organisation Opec meets in Vienna on Tuesday amid calls from some members, including Iran, to cut back production and push up prices further. But most analysts believe production quotas will be left unchanged. 'There's no pressure on Opec to do anything,' said Rob Laughlin, oil analyst at Man Financial.
 
He said the Nigerian situation could potentially be worse for oil prices than fears about a supply squeeze from Iran. Production levels in Nigeria have already been lowered by 200,000 barrels a day in an effort to protect facilities from the rebels, who have deliberately targeted foreign oil companies. 'Nigeria is probably as big a problem as Iran for us. We're pretty politically squeezed, between the Nigerian rebels and the Iranian president,' said Laughlin.
 
The president of Opec, Nigeria's Edmund Daukoru, fuelled market fears on Friday when he told Reuters that his organisation was unlikely to step in with extra supplies if the Iranian crisis worsened. 'If Iran decides to stop production, or is forced to stop production because of a sanction, I don't think Opec necessarily has a role to play there,' he said.
 
Crude peaked at just over $70 a barrel last autumn after hurricane Katrina, but demand from fast-growing economies such as China and India, together with supply shortages in a number of producing countries, has prevented prices from dropping much below $60.
 
Investment in Russian oil production has been weak since President Putin's tax raid on the oil giant Yukos, and Iraqi output is well below the levels Washington hoped for before coalition tanks rolled into Baghdad. A cold snap in the US, which has so far had an unusually warm winter, could push prices up further in the weeks ahead. 'Should cold weather return to the US, then we'll really be in trouble,' said Laughlin.
 
Copyright Guardian Newspapers Limited
 

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