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News | Oil Prices Heat Up as Sanctions Strike Iran Energy, Bank Sectors

22 Nov 2011 23:50Comments

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Iran Standard Time (IRST), GMT+3:30

FireDriver1.jpg11:50 p.m., 1 Azar/November 22 Crude oil prices rose Tuesday in reaction to the announcement of new sanctions against Iran's energy and banking industries by the United States, Great Britain, and Canada. The coordinated action, announced Monday, was a response to the report earlier this month by the International Atomic Energy Agency (IAEA) that expressed "serious concerns regarding possible military dimensions to Iran's nuclear programme." (See here for an analysis of the report by Tehran Bureau columnist Muhammad Sahimi.)

While an Iranian Foreign Ministry spokesman dismissed them as an ineffectual ploy in a Western "media and psychological warfare campaign," the new sanctions, aimed at cutting off the supply of equipment to Iran's oil industry and raising obstacles to the Islamic Republic's ability to conduct international financial transactions, may continue to drive oil prices higher, say some analysts. Carsten Fritsch, with Germany's Commerzbank, told DPA that the sanctions indicate that a "risk premium is warranted." And the energy sector in Iran -- the world's third leading producer of crude oil -- could indeed take a hit:

The sanctions also ban supplies to Iran's petrochemical industry, which exported 8 billion dollars worth of products last year, according to Ehsan Ul-Haq, an expert with the British energy consultancy KBC.

In addition, the financial sanctions could make trade with oil and petroleum products even more difficult for the country, which has already been affected by previous sanctions, he said. This might lead to less oil production in Iran and higher prices globally.

"At the moment, there is enough oil" to supply global markets, Ul-Haq said. "But if demand rises, there could be a problem."

Fritsch added that it might become difficult to finance new oil fields and to invest in Iran's energy sector if ties to the country's banks are cut. However, China might chose to step on and make up for missing Western funds, he said.

NightFireHoses2a.jpgAnalysts who spoke with Bloomberg Businessweek voiced similar views, and suggested that the effect on oil prices was being magnified by the ongoing turmoil in Egypt:
"There are new sanctions on Iran and rioters back on the streets of Cairo reminding us of the geopolitical risks that impact this market," said Michael Wittner, the head of oil-market research at Societe Generale SA in New York. "The geopolitical risks never went away, but had moved to the background and are now back in the forefront." [...]

"Concern about the Iranian sanction seems to be supporting the oil market," said Tom Bentz, a director with BNP Paribas Prime Brokerage Inc. "People are just worried about potential military action, whether that happens or not." [...]

"There is still political concern about Iran and Egypt and it's making people worried that we may see some supply problems," said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts.

A Wall Street Journal report underscored the psychological issues, while it also suggested that Iran may have places to turn for help:

Although it does not supply oil directly to the U.S., fears are that if its barrels were removed from the global portfolio it would pinch the remaining available supply. Markets are also nervous about reaction to the measures from Iran and its supporters; Russia protested against the U.S. sanctions, calling them "unacceptable."
"This Iran issue is getting thornier and thornier," said Pete Donovan, a vice president and oil trader at Vantage Trading. "You never know how that's going to go. It's a big powder keg."

[O]thers questioned how effective the sanctions will be or how much impact they may ultimately have.

"The lack of complete global unity on Iran does limit the effectiveness of the already significant sanctions on the country," J.P. Morgan said in a research note.

On Tuesday, as well, European Union diplomats reached agreement on a plan to expand the E.U.'s list of sanctioned Iranian individuals and entities by approximately 200 names. The move, also intended to ratchet up pressure on the Islamic Republic over its nuclear program, is scheduled for formal approval at a December 1 meeting of the union's foreign ministers. According to Reuters, "In addition to extending the sanctions list, EU governments are also expected to discuss proposals by France and Britain for further sanctions, such as targeting the Iranian central bank. France also wants to target the oil industry...[and] said on Tuesday it was pushing hard to persuade its EU counterparts to move quickly on its proposal."

Photos: National Iranian Drilling Company well control operations. Follow Tehran Bureau on Facebook and Twitter.

Copyright © 2011 Tehran Bureau

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