Guest Commentary: Will the Sanctions on Iran affect Oil Prices?

The Foreign Affairs Ministers of the top European Countries will convene today, Thursday December 1st in Brussels and will decide whether to impose sanctions on Iran including an embargo on Iranian oil. The escalation in the relation between Iran and UK only further accelerates the implementation of such sanctions.

If these steps will take place and major European countries will embargo the Iranian oil, how, if any, this news could affect the global crude oil market and in particular the oil prices?

The case of Libya comes into mind when considering the effect of turmoil in the Middle East on oil: in the recent uprise in Libya one of the ramifications was that the oil production came down from an average of 1.6 million bbl per day in 2010 to nearly zero during the past several months; this change was probably among the reasons for the sharp increase in oil prices especially Brent and the sharp hike in the difference between Brent and WTI.

But the current situation in Iran isn't similar to Libya's because even if Iran will be sanctioned by Europe, Iran will still be able to export oil the other countries including China and Japan.

According to the EIA, Iran is the second largest OPEC producer of Oil after Saudi Arabian; it nearly 3.6 million bbl/d of oil. In regards to Exports, during the first half of 2011: 18% of Iran's exports were to the EU countries led by Italy; 22% to China;14% to Japan; 13% to India.

In regards to the volume imported by European countries, Iran has sent nearly 0.45 million bbl/d and for Germany, Italy and Spain the Iranian oil represents nearly 13-14 percent of their imports. This shows that while Iran has a major role in EU countries' import of crude oil, Iran is also a major exporter to other countries that could increase their volume of imported Iranian oil if EU countries will stop to import oil from Iran.

Thus, if Iran will be sanctioned by EU countries, they will have to import crude oil from other countries. This means there might be a short term hike in the Brent and a further hike in the gap between Brent and WTI, but the prices might come down if these European countries will manage to quickly find other oil producing countries to import oil.

Since this embargo won't entail a decline in Iran's oil production as was the case in Libya, the effect of this oil embargo on oil prices might be very short lived.

For more on this subject:

Gold & Silver Prices – Daily Outlook December 1

Crude Oil Prices – Weekly Outlook November 28- December 2

By: Lior Cohen, Energy Analyst for Trading NRG