News Detail

• Oil prices have been moving upwards quite sharply due to increased and additional tightening of sanctions on Iran, though Simon Wardell of IHS does not anticipate a conflict at this stage.With Europe and Japan cutting off their take on Iranian crude, he does not think that the US will expect India and China to do the same because of the constant struggle for oil in these regions. The Iranian oil will find some market in the South East Asian markets. Though Saudi has promised to make up for the Iranian oil, there is less in the tag, there is less spare capacity and that is always a concern to oil markets.

• Wardell feels that it is going to be a fairly high price environment for this year at least and probably into the first half of next year.

• Q: When you look at the price levels for Brent and WTI, do you think these prices have factored in a potential military strike against Iran and an escalation in tensions by that?

• A: Since the beginning of the year prices are moving upwards pretty sharply as a result of what has been happening with the increased sanctions on Iran and the additional tightening of sanctions on Iran and the prospect of some possible disruptions from the region. So I think a lot of that is actually already been priced in to the market. At a USD 120-125 a barrel for Brent which is where we are right now the market is not suggesting that we are going to get a very serious conflict in the Middle East. If we did, I think we'd see much higher prices. But they do certainly reflect a very tight market with some of that Iranian oil taken out of the export market as a result of the EU sanction. So there is a reflection of the tightening oil balance in the global markets but I don't think markets are anticipating a conflict at this stage.

• Q: As these sanction dates come closer how do you expect prices will behave considering the several European nations including Japan have already considerably cut off their take of Iranian crude if not completely stopped it. We had a warning come out of the Obama Administration today to China and India saying these two countries need to do the same or else face extended sanctions. So what do you make of how prices will behave as we come closer to the sanction dates?

• A: The European Union has said that they are not going to buy Iranian oil. So there is around 500,000 barrels of Iranian exports that are no longer going to Europe. Now the US has sanctions which can take measures against central banks which deal with the Iranian government and countries such as India and China which continue to buy oil from Iran could potentially risk US sanctions on this basis. However the sanctions is discretionary in some regards and I think the US is perhaps going to be very lenient in terms of countries like India and China which really do struggle to find alternate suppliers out there specially given this tight market. So to try and imagine that all Iranian exports will stop and that China and India won't be buying Iranian oil is probably a little bit of stretch. I don't think the US would try and take measures to really retch up trade restrictions against those countries. So our view is that Iran will manage to sell a good portion of its oil into the market but it is going to be more difficult for Iran. They are probably going to have to discount to place some of that oil and they probably are going to sell all the volume that they would have liked with the Europeans no longer in the market. So it is going to get tougher for Iran. But we don't imagine that Iranian oil will completely get out of the market. If it did we'd see very serious upward price tensions given where supply and demand balances right now. One can't really afford to lose all of those Iranian exports right now without really seriously putting further upward pressure on prices. I think that's a consideration for US in terms of how to apply those sanctions to other countries. So I imagine that India and China will continue to buy Iranian oil for the immediate future.

• Q: Can you tell me how the math works out according to you? Let us assume for a moment that Iranian supply goes off the table altogether, the Saudis have said that they will step in to make up for that shortfall of supply. In fact we had several comments coming in from Saudi Oil Minister Naimi yesterday. Will the Saudis supply be able to make up the shortfall in Iranian oil supply?

• A: The Saudis have increased by something in a range of 400,000-500,000 barrels a day from when Iran first saw volumes to Europe dwindling. Now we anticipate that the 500,000 barrels a day or so that Iran was selling into Europe is going to find buyers in Southeast Asia. We don't expect all of it to be placed but we expect a reasonable amount will find its way into markets. So certainly southeast can compensate for that. If we were to see all Iranian exports seized then I think the southeast would need to produce pretty much everything they have available in spare capacity to compensate for the non availability. But it would be extremely tight and you would have very razor thin margins in terms of further supply disruption. So we are not anticipating that. We think that the volumes going to Europe are going to go out of the market but not fully. They will find alternative buyers for some of that at least and the Saudis should be able to compensate for the remaining.

• Q: I want to go back to Saudi Arabia's minister's comments. He seems to want to soothe fears about high oil prices. He said that Saudi Arabia was ready to raise out to full capacity but he also made a comment that crude at USD 125 per barrel was not justified given the anemic state of the world economy. What do you make of Naimi's attempts to talk down crude prices?

• A: Of course each time the Saudis have increased production, there is less in the tag, there is less spare capacity and that is always a concern to oil markets. They like to have that safety zone, that buffer available in case there is a disruption. The Saudis haven't gone through their full capacity in our view. We think there is probably another million and a half barrels a day they could produce a little elsewhere in some of the OPEC countries as well which could be called upon. But it is not a huge amount given the possibility of further disruptions elsewhere. We do expect Libya to come back. We expect a bit more coming through from Sedan if we can ease the difficulties between the two states there. But it is very thin margins and the Saudis always want to keep a little bit back. We do have very anemic economic growth, a fragile global economy but I think markets are trying to price in the risk of a disruption given this pretty tight balance within the next few months.

• Q: What you seem to be saying is that you expect prices to continue to move up despite this low growth scenario?

• A: What we will see is prices beginning to soften a little bit as we do get additional capacity coming on stream over the course of the year. We are not expecting large volumes of growth to come through. We should start to see easing in that balance but it is going to take a few months and the tensions regarding Iran and those background worries over Middle East stability aren't going to go away. So while we think prices may gradually soften over the next six to nine to twelve months, they are not going to fall back all that sharply unless of course we have some serious economic problems emerging somewhere else. So I think it is going to be a fairly high price environment for this year at least and probably into the first half of next year.

• Q: When you say soften, can you give me a range by how much?

• A: We think Brent might drop below 115-120 in Q3-Q4 of this year but we don't see it going much below that in the near-term because we have a serious problem in the global economy.

• Q: What happens if there is a military strike? One previous analyst from Nomura thought the chances of a military strike on Iran are less than 30%. I am not trying to put a number on it and make it frivolous but I do want to try and understand if we can assess how prices will behave, where they will go, how far they will go if in fact the situation escalates into a military conflict?

• A: I don't know how you can put a percentage opportunity clearly there is a risk given the tensions that there could be some form of conflict. We don't think it is likely, certainly not in this year and we think that there may well be a negotiated way out of this eventually but that is not to say there is no risk of a conflict. If we did get a conflict, it would very much depend on the nature of that conflict who is involved and what sort of actions be taken. But I certainly imagine seeing a very sharp reaction to crude prices. Our anticipation is it probably wouldn't be a sustained reaction on crude prices but so much would depend on the circumstances of any conflict itself. It is difficult to speculate just how much they would go, how much they would rise by and for how long. The likelihood you will see very steep spike in prices and they would come down fairly quickly but you will still see a higher price than you would have otherwise.

Source