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Monday, February 27, 2012

impact of Middle East tension on oil prices

impact of Middle East tension on oil prices : Rising tension between Iran and the West is increasing political and economic risks for sovereign and corporate issuers in the Middle East and focusing attention on the key role of the Strait of Hormuz in trade for the Gulf.

Crude oil futures across both sides of the Atlantic fell in Monday trading after five straight sessions of gains, as investors sold to take cash amid weaker European equities.

At 1051 GMT, the April Brent contract on London's ICE futures exchange was down $1.82, or 1.5%, at $123.64 a barrel. The April contract on the New York Mercantile Exchange was trading down $1.45, or 1.3%, at $108.32 a barrel.

News from the IMF that they are starting to get worried about higher oil prices has a dampening affect on oil prices and triggers profit taking, Although prices came off slightly, analysts said the outlook is still bullish, with tension in the Middle East, including Iran and Syria, and halted oil production from South Sudan, feeding into fears about supply.

Even if the U.S. and IEA consider another strategic stock release to cool prices, in the long term the threat of supply disruption is likely to remain.

In response to tougher sanctions, including a boycott of Iranian oil exports by the EU, Iran has threatened retaliation, notably in the form of a blockade of the Strait of Hormuz, a conduit for the flow of oil and gas out of the Gulf.

So far, these threats have been verbal, but analysts are not ruling out the possibility that the current exchanges of rhetoric could spark disruptions to trade flowing through the Strait, or even in an extreme scenario, military confrontation.

At this time, we think the current developments in relation to Iran are captured in our ratings on countries and corporate issuers in the region and so we do not expect any immediate actions. Nevertheless, political pressures in the Middle East are acute, and any sudden deterioration in the situation could lead us to reassess this view.

In the absence of a diplomatic solution, we believe Iran could respond in some way to the latest wave of sanctions and international pressure, most likely--and past behavior suggests this--through low-level provocation.

For example, Iranian authorities could slow shipping through the Strait of Hormuz and disrupt the timely supply of oil from the Gulf by imposing tanker inspections, boarding merchant ships, and otherwise obstructing shipping routes in its territorial waters.

Such low-scale provocation and simmering tension would in our view keep oil prices at their currently high level. This is because markets would increasingly view the specter of armed conflict as a real, if remote, possibility.

For oil-producing sovereigns of the Gulf Cooperation Council--Saudi Arabia, UAE, Qatar, Kuwait, Oman, and to a lesser extent, Bahrain--higher oil prices would actually be beneficial, As oil exporters, they would receive more foreign earnings that they could either use to stimulate demand or improve their government's balance sheets.

In contrast, the fiscal and external balances of oil importers in the Middle East--especially Jordan, Egypt, and Lebanon--are already stretched. As such, they are ill prepared for a further rise in oil prices. Furthermore, countries in need of attracting investor appetite in 2012, such as Egypt, could suffer from an elevated risk premium in their debt financing. Other non-oil trade could also be affected because of higher transaction and logistics costs for shipping imports into the Gulf states through the Strait of Hormuz.

we currently see a very low likelihood of a severe disruption of oil supplies through the Strait, a potential oil shock would pose a worrying specter. "Such a disruption of oil supply, should it continue over a period of several months, would in our view lead to a spike in oil prices, which would fuel inflation and upset a fragile economic recovery in both developed and emerging markets.

The ensuing uncertainty would also likely unsettle financial markets, leading to higher bond yields and once again add to refinancing difficulties for sovereigns on the periphery of the eurozone. While it's uncertain how rapidly or how high oil prices would rise in such a scenario, our economists envisage that a price of $150 per barrel is not absurd, and would most likely push the world economies into a recession

-. The Impact Of Rising Gulf Tensions On Sovereigns In The Middle East
-. Closing The Strait Of Hormuz: The Risks For Corporate And Infrastructure Issuers
-. Tension in the Gulf: How An Oil Shock Could Threaten Global Economic Growth.
-. Crude oil consolidates gains after bull run, analysts say
-. Firmer dollar against the euro makes oil a less attractive buy
-. Comments at G20 meeting about risk of global slowdown has dampening effect on prices, says an analyst
-. Tension between Iran and the West provides underlying support for prices

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