New record oil price on the cards

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IOL BR pic jan3 oil iraq output Associated Press

Frankfurt - Iran's threat to block oil transport in the Strait of Hormuz came as markets closed for the New Year holidays, but oil prices could soar if the conflict over Tehran's nuclear programme escalates and the country makes good on its warning.

Iran made the headlines at the start of the year by testing cruise missiles.

The country, which is a member of the Organization of the Petroleum Exporting Countries (OPEC) tried its most modern naval defence weapon as tensions rose over new sanctions by the United States.

Those measures, signed into law by US President Barack Obama on Saturday, target Iran's oil trade by banning business with Tehran's central bank. They are aimed at pressuring Tehran to stop its controversial nuclear programme.

Before Iran started flexing its military muscles, its vice president, Mohammad-Reza Rahimi, warned last week that his country would not allow “one drop of oil” through the Strait of Hormuz, should Western governments impose further punitive measures.

An estimated 40 per cent of the oil transported by ship globally travels through this waterway, which is the gate to the Persian Gulf.

The strait, which is 50 kilometres wide, is a “bottleneck” and the risk of a blockade by Iran is real, said Frank Schallenberger, a commodity expert at the German bank Landesbank Baden-Wuerttemberg.

“Should Iran really carry out its threat of a blockade, the oil price will shoot up,” he warned.

Western industrialized countries would be able to compensate at first by tapping into their strategic reserves. “But the reserves are limited,” Schallenberger said.

If the situation escalated, oil prices could rise by 20 per cent in the short term, he estimated.

Benchmark prices currently stand at slightly below 99 dollars per barrel for the US brand West Texas Intermediate, and slightly above 107 dollars for the European brand Brent.

If the Strait Of Hormuz were closed off for a longer period, new record prices above the 2008 historical high of 150 dollars would be possible, he said.

However, Schallenberger said a long-term shut-down of traffic in the Gulf is very unlikely.

All other countries on the Gulf, including Saudi Arabia, have a keen interest in keeping the waterway open and would bring strong pressure to bear on their fellow OPEC member Iran to allow shipments.

Many of these Arab countries also share the West's suspicions that Iran is working on a nuclear weapon. These concerns were reinforced late last year, when the International Atomic Energy Agency produced a detailed report about various military weapons projects in Iran.

Geopolitical risks have moved oil prices time and again in recent years.

In 2011, the civil war in Libya sent jitters through commodity markets, as the OPEC country stopped all production while the conflict was going on.

However, Libya's exports are only a fraction of the amount travelling through the Strait of Hormuz.

But even if Iran does not block traffic in the Persian Gulf, experts expect oil prices to rise this year, pointing to booming economies in Asia and expansionary monetary policies in various countries.

“A boundless expansion of money supply can find its way into commodity markets and can fire up oil prices,” said Thilo Heidrich, a German expert at Postbank.

Consumers should therefore brace themselves for higher oil prices, no matter what happens in the Persian Gulf. - Sapa-dpa


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