Pending sanctions against Iran are designed to cause swifter economic pain than past penalties, and Iran is ramping up rhetoric in response.
That could keep the pressure on oil prices, but analysts do not expect to see Nymex crude surge much above $100 a barrel, in a sustained way, unless there are further developments to threaten world oil supplies.
New U.S. sanctions, approved by Congress, await President Obama’s signature and would for the first time target the Iranian central bank. At the same time, European officials are discussing a ban on imports of Iranian oil, which is about of third of what Iran exports.
The new sanctions come after a recent International Atomic Energy Agency report suggested that Iran’s nuclear program was military in nature, a claim denied by Iran.
Iran’s first vice president, Mohammad-Reza Rahimi Tuesday warned that Iran would retaliate against any crackdown by blocking all oil shipments through the Strait of Hormuz, a critical waterway for transporting nearly 20 percent of world oil supply.
That comment helped drive up Nymex crude by about 1.5 percent to over $101 Tuesday. Iran produces an estimated 3.6 million barrels of oil per day, about 4 percent of the world’s production, and exports about 2.1 to 2.3 million, according to IHS CERA.
Oil on Wednesday gave up Tuesday’s gains, falling below $100, even as Iran’s top naval commander also spoke to the the threat. “Closing the Strait of Hormuz for Iran’s armed forces is really easy…or as Iranians say it will be easier than drinking a glass of water,” said Habibaollah Sayyari in a comment on Iran’s English language Press TV. “But right now, we don’t need to shut it as we have the Sea of Oman under control, and we can control the transit.”
Rand Corp Iran analyst Alirez Nader said on CNBC's "Squawk on the Street,” that the threats should be taken seriously but within the context of what Iran might really do.
“If Iran closes down the Strait, and I don’t think they can really close down the Strait, they can impede traffic. This will hurt Iran’s economy as much as anybody else. They rely on oil revenues for the government budget—40 to 80 percent. So, if Iran takes military action, this could be devastating for the Iranian government as well,” he said.
Nader stressed that neither the U.S. nor Iran wants military action, but Iran is using its threats in an effort to prevent an oil embargo. The U.S. Fifth Fleet Wednesday said it would not allow any disruption of traffic in the Strait, in response to the Iranian comments. “Anyone who threatens to disrupt freedom of navigation in an international strait is clearly outside the community of nations; any disruption will not be tolerated,” a spokesperson for the Fleet said.
Western governments are balancing how the use of sanctions might hurt the Iranian economy against how they may drive up the price of oil, hurting the global economy. Unlike past penalties, these new sanctions take aim directly at Iran’s ability to export the oil it produces at a full market price, rather than its production.
"“I think in particular on the Central Bank of Iran that the U.S. will enact something before the end of the year that will make it very difficult for European refineries, Japanese refineries and Korean refiners to process payments” with Iran. "
The degree of the impact will depend on what extent countries comply with the sanctions. “I think in particular on the Central Bank of Iran that the U.S. will enact something before the end of the year that will make it very difficult for European refineries, Japanese refineries and Korean refiners to process payments” with Iran, said Trevor Houser, director of energy and climate practice at the Rhodium Group.
“You have in the case of Europe, Korea and Japan, private banks that facilitate trade between refineries and Iran,” he said, adding those banks would not want to be barred from doing business with the U.S. financial system.
“I think it will be much more successful in disrupting Iranian crude exports than any sanctions to date have been. It’s still unclear what the impact would be on Iranian government revenues,” Houser said, adding that a ball park estimate is that there could be a reduction in Iranian government revenues of 20 to 30 percent.
Should Europe cut off its imports, that puts more than 800,000 barrels a day of Iranian oil back into the market. With Japan and Korea out of the market, China and India may be the likely buyers but demand a steep discount.
China is Iran’s biggest customer, purchasing more than 500,000 barrels per day, and it is expected that China would try to wrangle a cheaper price with more Iranian oil on the market. In mid-December, China’s Sinopec was reported to still be arguing with Iran over the price and amount of oil it would import in 2012.
“The trick is you have to do it [sanctions] in a way that doesn’t spook the market because doing so increases [Iranian] government revenues,” said Houser. “You actually have to keep Iranian supply on line and just redirect it to other buyers and do so in a way that would reduce the price Iran would get for its oil.”
Houser said past sanctions, aimed at Iran’s upstream operations, have taken a toll. At its peak, he said Iran produced 4 million barrels per day of oil, which fell to 3.6 million barrels and could go to 3 million barrels, according to the International Energy Agency.
“I would expect to see a reaction from the Iranians when the president signs the sanctions bill into law. The move after that will be European decision on an embargo,” said Houser. There is also flexibility in the bill allowing for implementation of sanctions, based on input from the Department of Energy on the oil market.
A wild card is Israel and whether it would take action against Iran as it did in 1981 when it bombed a Iraqi nuclear reactor outside Baghdad.
The European position is also still unclear, as an embargo could impact already struggling economies there. Italy is the biggest European user of Iranian oil, importing an estimated 183,000 barrels a day.
Japan and India the biggest importers after China, each importing more than 300,000 barrels a day.
Follow Patti Domm on Twitter: @pattidomm