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Iran Tension Will Keep Oil Prices High: Analyst


The tensions over Iran and threats from the West to apply sanctions on Iranian oil will see crude prices facing more of an upside risk in the near future, a commodities analyst told CNBC.

Iranian navy conducts the "Velayat-90" naval wargames in the Strait of Hormuz in southern Iran on January 1, 2012. Iran defiantly announced that it had tested a new missile and made an advance in its nuclear programme after the United States unleashed extra sanctions that sent its currency to a record low.

"Most of it has been priced in [oil prices] because the embargo news came out a week ago.

Markets are jittery. We know if the EU imposes the embargo then Iran will probably send most of its crude to China," Amrita Sen, commodities analyst at Barclays Capital, said.

Sen added that a crucial impact on oil prices would be if other countries outside of the US and Europe joined in with an embargo of Iranian oil.

The threat to the supply of Iranian crude has risen dramatically in recent weeks, with a war of words erupting between the US and Iran and a threat by the European Union that it will also be seeking to ban imports of Iranian oil as a response to Iran's continuation of its nuclear program.

Reports suggest the EU may be seeking to bring forward a meeting which will determine when an embargo on Iranian crude will be enforced as an agreement in principle to ban imports of oil already exists.

Iran has threatened to shut down the strategically important oil trade route of the Strait of Hormuz in the Persian Gulf.

The strait sees around 15 million barrels a day pass through and analysts are at odds whether the result of a closure would see many weeks of disruption and rising oil prices or more limited disruption.

"If the Strait is affected in any way we are looking at significantly higher oil prices; I wouldn't even dare to put a price on it, but around $200 dollars a barrel.

If Iran can't sell to Asia then its revenues will get hurt," Sen added.

However, Julian Jessop, chief global economist at Capital Economics, told that an Iranian closure of the Strait of Hormuz was an unlikely scenario despite the ramped-up rhetoric.

"The closure of the Strait of Hormuz would be the worst-case scenario but it is also unlikely.

It is not in the West's interest and certainly not in Iran's interest to close the Strait.

If this does happen we would put the price of crude at $210 a barrel," Jessop said.

He added that a far bigger threat to rising oil prices was the macroeconomic situation, in particular the euro zone debt crisis which he felt would result in a break-up of the single currency union with one or more countries leaving.