A political risk premium is being added to the price of oil and the latest move by Iran tohalt exports of oil to France and Britain is an indication that crude oil prices will remain volatile for some time, Simon Wardell, Senior Oil Analyst at IHS CERA told CNBC.
Brent crudeclimbed above $121 a barrel early Monday – hitting an eight month high - following an announcement by Iran’s oil ministry that it was stopping sales of oil to Britain and France ahead of a planned EU embargo due to begin on July 1.
“It’s Iran saying there may be further disruption and this is a warning to other European countries who may import a lot more oil,” Wardell explained.
Wardell said he believed threats to close the Strait of Hormuz, where an estimated 40 percent of the world’s oil supply passes, were not likely to materialize in the short term, but he stressed instability in Iran and the wider Middle East would keep prices high in the short term.
“It’s hard to see the oil price decreasing, especially with the Iran situation, which I don’t think is going to go away anytime soon,” he said.
“Then you have to consider the wider situation with Syria and the Arab Spring which is still ongoing and I think has certainly contributed to people’s views of the stability of the entire region,” he added.
"I think there has definitely been a ratcheting up in the political risk premium put on oil prices on an almost permanent basis in the Middle East… it’s something which we have to get used to,” Wardell said.
But he added that eventually oil prices could fall almost as sharply as they have risen.
“I think it’s going to go higher in the near term, we think there’s a lot behind it to push things up on the risk side, but I think that there’s a limit in terms of where it can go and there’s still a lot of economic downside risk, which I think could push things back down pretty quickly.”