Iran-Israel conflict concerns support oil risk premium
An Israeli F-16 jet fighter as it takes off from an air force base in southern Israel during an exercise. | EPA/JIM HOLLANDER/FILE
On 13 August, oil prices hit a new three-month high above $115 a barrel on the back of increased fear about the possible escalation of the conflict between Israel and Iran and concerns about a shortage of North Sea crude supplies. The jump in prices came within hours of a series of leaks and anonymous briefings to Israeli media that senior Israeli leaders are reportedly discussing the prospect of military action with greater urgency than ever.
ICE September Brent climbed in early trading to $115.11 a barrel, its highest level since early May. It later pared gains but still was up 65 cents to $113.60 a barrel. By early afternoon in Europe, benchmark crude for September delivery was up 80 cents at $93.67 a barrel in electronic trading on the New York Mercantile Exchange.
Brent’s climb to three-month highs was seen spurred by declining crude output in the North Sea. Moreover, sanctions have curbed Iranian output, while an intensification of debate in Israel on whether to go to war with Iran over its nuclear work added to concerns about disruption of Middle East supply.
On 12 August, Israeli Prime Minister Benjamin Netanyahu reiterated warnings about the threat from Iran’s nuclear programme, which Tehran claims is only for peaceful aims like generating electricity. “All threats directed at the Israeli home front are dwarfed by another threat, different in its magnitude and substance, and so I have repeated and shall repeat: Iran must not be allowed to obtain nuclear weapons,” Netanyahu told his Cabinet.
Chris Weafer, chief strategist at Troika Dialogue in Moscow, wrote in a note to investors on 13 August that the risk premium is supported by Middle East uncertainty. “The reason for the still-high Brent price is because of the risk posed by the lack of clarity over the next steps in the stand-off with Iran and also because of the concern that the conflict in Syria might escalate to embroil other countries in the region, threatening oil supply routes. The attack against Egyptian forces by rebels in Sinai, close to the Suez Canal, also adds to the risk factor,” Weafer wrote.
He noted that fundamentals point to a Brent price of $100 per barrel, or lower, rather than $110 per barrel. No doubt, if those risk factors are removed or ease significantly in coming weeks, then Brent will again quickly test $100 per barrel, he wrote. Weafer explained that demand from China is slowing, US production of shale oil is rising and Iraqi production is climbing steadily.
On 9 August, the Organization of Petroleum Exporting Countries (OPEC) published its monthly oil report and stuck with its forecast of 900,000 barrels per day growth in global demand for this year and a further gain of 800,000 barrels per day in 2013. All of that demand growth is expected to come from China, Asia and the Middle East. OPEC did however say that it believes the risks to be “skewed to the downside”. “This is one reason why Saudi Arabia scaled back its average production in July by 300,000 barrels per day to 9.8mn barrels per day,” Weafer wrote. Iraq continues to boost its average daily production and last month exceeded 3mn barrels per day for the first time since 2002. The country aims to reach an average production target of 5mn barrels per day over the medium term. (KG) new europe on line
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