The clock is ticking – Monday’s EU meeting is vital for the oil market
The clock is ticking – Monday is vital for the oil market and oil prices as the EU members will meet to finalize new sanctions against Iran. International pressure is mounting on Iran to suspend its nuclear enrichment program.
Large oil consuming countries are worried
Iran’s threats to close down the Strait of Hormuz if the EU imposes sanctions on Iran’s oil exports have worried large oil consuming countries such as China, India, South Korea and Japan, that are all importing a vital share of their oil from Iran.
A closedown of the strait can push oil prices far above the current oil price at around USD 111/barrel depending on the escalation in tension. Oil prices have already increased by around USD 6/barrel on concerns over global oil supplies, but a possible embargo driven halt in oil exports, military confrontation in the Strait of Hormuz damaging parts of the shipping fleet, refineries or production installation or/and an Israeli attack on Iran’s nuclear facilities can push oil prices up to between USD 120-200/barrel.
EU has prepared a draft for an oil and financial embargo
European nations agreed yesterday to sanction Iran’s central bank, freezing assets used to finance its nuclear ambitions, but did not come to an agreement on an oil embargo. Diplomats from the 27 EU nations have held meetings this week to draft a proposal for an oil and financial embargo against Teheran that would formally be adopted when foreign ministers meet on Monday. Concerns from Greece prevented a deal on the proposed oil embargo, but it is likely that EU members will have another go to draft a proposal ahead of the foreign ministers’ meeting.
Large oil importers have already started to look at alternative suppliers of oil to spread their risk away from Iranian supplies. In Europe refiners have started to sever links with Iran stopping spot purchases of crude ahead of the EU meeting. Some refiners have either stopped or reduced new purchases of Iranian oil, although they continue to receive monthly oil supplies under long-term agreements. Representatives from China wrapped up their trip to Saudi Arabia, the United Arab Emirates and Qatar trying to reduce the risk of relying too much of one region or supplier. These concerns have intensified as Iran, China’s third largest foreign supplier after Saudi Arabia and Angola had come under increasing pressure lately.
New sanctions – but not not followed by all
US officials have travelled the world to try to get countries to comply with its new sanctions against Iran targeting the central bank which routes most oil transactions. So far neither China nor India have agreed to support the new sanctions against Iran. Without support from large market players such as China and India, the sanctions will be less effective as the Iranian economy will not be affected to the same extent. Oil exports account for nearly 80% of Iran’s total exports and 50% of the government’s revenue. The loss of oil export revenues could add to the existing tension within the regime.
Thina Margrethe Saltvedt
Senior Analyst
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