Oil Prices Due to Rise With Iran Oil Embargo Looming

Source: Ben Gersten, Money Morning  (6/11/12)

"Three possible scenarios could escalate oil prices as high as $440/bbl."

After an abysmal May, oil prices might be at their low.

From May 1 to June 1 crude oil prices fell 21.8% from $106.50 to $83.23 a barrel, the steepest monthly drop since December 2008.

One week later oil is still hovering around the $83 mark. But why is oil still down?

Oil has also been hampered by weaker than expected economic reports in the United States, suggesting that the world's biggest economy is still struggling in its recovery.

Also the Eurozone debt crisis has had a strengthening effect on the U.S. dollar, which has helped push oil prices down as the dollar is the global currency for oil.

But many experts say the rise in oil prices is inevitable. From a projected 25% increase in global demand by 2015 to the possibility of Iran closing the Strait of Hormuz, there are many factors in play here.

As Money Morning's Chief Investment Strategist Keith Fitz-Gerald stated, "demand isn't the only driving force in oil prices." Also contributing, he says, "are geopolitics, supply constrictions, wars and tyrants with their hand on crude spigots."

Iran Oil Embargo Effect

As summer approaches more motorists won't be the only factor affecting the supply and demand of oil.

On January 23, the European Union agreed to place an embargo on Iranian oil starting July 1 and will subsequently freeze the assets of Iran's central bank.

In response to those decisions Iran announced a month later that it would stop all sales of oil to Britain and France.

Then SWIFT (Society for Worldwide Interbank Financial Telecommunication), instructed by the EU and pressured by the U.S., disconnected 25 Iranian banks including the Central Bank of Iran, from its services.

SWIFT is responsible for more than 80% of the world's financial transactions and electronic money transfers.

Iran's leaders remain steadfast in their decision to continue questionable nuclear activities and have stated that they can withstand the effects of the embargo and current economic sanctions.

So far Iranian oil exports are down more than 25% this year.

How High Can Oil Prices Go?

A special report by Money Morning's own energy expert indicated three reasons or possible scenarios that could contribute to the escalation in oil prices.

  • The increasing shortage of supply in Europe stemming from less Libyan oil, problems in the North Sea, and the Iran oil embargo which could result in a shortage of 600,000 barrels a day.
  • The ever present threat by Iran to respond to sanctions by shutting down the Strait of Hormuz, through which 17 million barrels of Middle Eastern crude travel to Western refineries every day.
  • The possibility that Israel could stage a pre-emptive strike against Iran to stop its nuclear weapons program, plunging the Middle East into war and disrupting the global oil-supply chain.

Moors says any one of those events would push crude sharply higher. Estimates for the impact on oil prices if all three occur range from $200 a barrel to as high as $440. These numbers might seem high, but are a definite possibility.

Even if none of those events occur oil prices should still rise from the increased demand and supply constraints it faces.

Ben Gersten
Money Morning

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