The European Union’s threatened boycott of crude oil imports from Iran is likely to have little effect on global oil prices, the Iranian economy, or its controversial nuclear program because the country will be able to find other buyers such as China, analysts said.
The EU agreed the measure in principle on January 4 in the latest effort to persuade Iran to suspend its enrichment of uranium in a nuclear program which Iran says is purely for peaceful domestic purposes but which the UN, US and EU say has aggressive intent.
The timing and duration of the proposed import ban will be discussed again at another meeting of EU foreign ministers on January 30 when ministers are likely to find ways of imposing the measures when demand falls after the European winter, analysts said.
Even if ministers agree on implementation, it’s unlikely to roil markets because the 450,000 barrels of Iranian crude currently imported by the EU – going principally to Italy, Spain, France and Greece — represent only about 0.5% of the world market; there are other willing buyers, and plenty of alternative suppliers to the European market.
“The effect will be negligible,” said Brian Habacivch, senior vice president at Fellon McCord, an energy consulting and management company. “Iran can go to a lot of other places.”
As a result, there will be no impact of the supply-demand balance globally and limited effect on US and European crude-price benchmarks, he said.
Iran Forced Into A Discount?
Still, some analysts predicted Iran would be forced to sell its crude at a discount to buyers such as China, as those buyers will be quick to recognize that Iran will lose 18% of its market as a result of the European ban.
Phil Flynn, an oil analyst at the Chicago-based trading firm PFG Best, predicted China and other buyers could secure a price cut of $10 a barrel for the Iranian crude if the European boycott is imposed.
In response to the threatened EU sanction, Iran has threatened to close the strategically important Strait of Hormuz, through which about a third of the world’s seaborne oil exports pass.
The possibility of an Iranian blockade at Hormuz has put upward pressure on world crude prices, and that was probably Iran’s intention, but they are unlikely to try to close the strait at the head of the Persian Gulf because of the strong military response that would come from the US and other countries, analysts said.
“It’s all bluff and bluster in an attempt to get oil prices higher so they can make as much money as they can before the embargo goes into effect,” said Flynn.
Any attempt to close Hormuz would cause an immediate price spike of $20-$30 a barrel, Flynn predicted, but that action would also spur additional supply such as a new release from the US Strategic Petroleum Reserve, and higher output by top producers such as Saudi Arabia, together offsetting an Iranian move.
Bob McNally, president of Rapidan Group, an energy market consultancy, predicted the planned European sanction will go into effect, and that its member countries will turn to Russia, Angola, Nigeria and Persian Gulf producers to make up for missing Iranian crude.
While global prices are unlikely to be affected by the action, some buyers of Iranian crude would benefit from getting oil at distressed prices, McNally said. “They will extract maximum commercial advantage,” he said.
Photo Caption: Ships from the Iranian navy.