US oil prices are flirting with $100 a barrel but don't fully reflect the potential for escalating tensions between the West and Iran, oil experts say.
The strained relationship between Britain and Iran took a turn for the worst Tuesday when students in Tehran stormed two British embassy compounds, where they broke windows, burned the British flag and threw petrol bombs.
The Iranian government this week expelled the British ambassador in retaliation for new economic sanctions that would sever relationships between British financial institutions and Iranian institutions, including its central bank.
West Texas Intermediate was just below $100 a barrel Tuesday, while Brent crude , more a reflection of international oil prices, surged above $110.
"I would call it a very muted response," said Tom Kloza, chief energy analyst with the Oil Price Information Service (OPIS). "I could tell you, though, the trading community is not willing to buy the the rabble-rousing at the moment. There's many times this kind of news would cause a 3 or 4 percent pop in the marketplace...But that's not happening."
That said, Kloza added the situation is potentially explosive and could change at any time, driving oil sharply higher.
"I wouldn't say it's falling on deaf ears...but there are so many economic worries and demand destruction that it would take an actual event where crude doesn't get discharged or gets delayed to impact the markets. Obviously, mischief in Iran is going to have a much bigger impact on the overseas price of crude, and that's happening," he said, noting Brent's gain is outpacing WTI.
"If this begins a pattern of obviously higher tensions, that would be reflected in the oil price."
Kloza said that even in the heating oil market, demand is down about 20 percent in the shoulder season due, in part, to warm weather. At the same time, retail prices for heating oil at $3.75 to $4 a gallon is at a record high level for this time of year, heading into December.
Analysts say even at $100, the oil price is not reflecting much of a premium from Iran.
Ed Morse, Citigroup global head of commodities research, said he believes about $10 of the current oil price reflects Iran and other geopolitical concerns.
He said the impact is difficult to calculate, in part because it's unclear how much Saudi Arabia could pump to replace any lost oil production. "There's doubt about how much spare capacity Saudi Arabia has," he said.
Analysts say, however, that the geopolitical premium is not as high as it has been in other times of tension.
"Iran, and the Middle East in general, have kind of faded from the oil price. The oil price has been driven more than anything else by concerns about Europe and slowing in China," said Daniel Yergin, CEO of IHS CERA. "I think we're going to see, as talk increases about sanctions on Iran and Iran makes counter-threats in response, that it's going to start to play more into the oil price."
Unless the oil supplies are impacted, the rhetoric alone from Iran is not likely to drive prices much higher.
"I think we're going to be stuck in a range for a while between $90 and $110. We could possibly trade back down toward $85, where we were in October, but I think given what's going on in the Middle East that against that backdrop it's going to be tough to get there," said Addison Armstrong of Tradition Energy.
The British sanctions were announced last week when the U.S. and Canada also announced their own series of economic restrictions on Iran. The U.S. plans to discourage banks from dealing with Iran by dubbing it a "money laundering" concern and blacklisting entities suspected of helping with its nuclear program.
It stopped short of targeting Iran's central bank, but there is pressure from Congress to take the sanctions further. Canada said it would ban exports of all goods used in Iran's petrochemical and oil and gas industry and block most transactions with Iran.
"If this begins a pattern of obviously higher tensions, that would be reflected in the oil price," said Yergin. "This appears to be the beginning of a new cycle of tensions. The price would depend both on what actually happens to the flows of oil but to the overall level of enmity, given what happened today,"
The latest wave of economic sanctions follow a recent International Atomic Energy Agency report suggesting Iran's nuclear program was military in nature. Iran denies the claim. but Western governments moved to place tougher sanctions on Iran.
"I think Europe and the U.S. are on a track to put sanctions in place and [French President Nicolas] Sarkozy has gone so far as to call for a ban on the import or Iranian oil into Europe ... The country people haven't focused on much is Japan. Japan is a big buyer of Iranian oil. To be meaningful, they would have to be folded in to any sanctions," said Yergin.
European foreign ministers meet Thursday to discuss sanctions on Iran, and European Union officials discussed Iran during meetings with the Obama Administration Monday.
Iran produces about 4 percent of global oil supply. This year, it produced about 3.6-3.7 million barrels a day, and its estimated exports are 2.1 to 2.3 million barrels, according to IHS CERA.
Ray Carbone, president of Paramount Options, said it would be tough for Europe to ban Iranian imports since its costs of importing oil have been rising, from $250 billion in 2010 to $400 billion in 2011.
"I think the macro picture is bearish but the geopolitical issue has some very serious upside consequences, and that's the push and pull going on, and it's been accelerated because of our [U.S. troops'] quickened departure from Iraq," said Carbone.
"We're up at these levels because of geopolitical tensions," Carbone added. "The fears are out there."
Armstrong said if the Europeans did ban Iranian oil imports, there would still be willing buyers in China, India and Japan. "I think the Europeans are at least making all the right noises ahead of the foreign ministers meeting this week. It remains to be seen what they do but it's a distinct possibility. I think the West has to exhaust all economic means of trying to stop this before resorting to force," he said.
Carbone said the $100 oil price is not really supported in the marketplace without a Mideast premium. "What's going to take pressure off of oil prices is the supply, demand equation ... I just don't think macro picture-wise we are going to sustain $100 for a long time. We're getting into a very strange period where prices are not always reflective of supply and demand. December kind of plateaus and then we rally," he said.
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