Business Times

Factors impacting oil prices

By Sharad Sri Arpico Ataraxia Partner/Director

Oil will rise, in fact we expect it too. It is a seasonal thing really, as more Americans are on the move over Christmas and heating requirements increase with the Northern winter pending, this is high-season for oil prices (similar to airline tickets). Nonetheless, the current high stakes poker game that is Israel vs. Iran, adds a new dimension.

Comments from Elliott Abrams, a former assistant secretary in both the Reagan and Jnr Bush administrations seem to clarify the issue in my mind rather well "the choice might come down to whether it’s better to bomb Iran or let Iran have the bomb". Many analysts argue that like India or Pakistan, the world will come to learn to live with a nuclear Iran. Ironically the Iranians continue to deny the existence of any program (that is another story itself).

Everyone agrees that crude oil is a finite resource, but when it comes to the oil game, geopolitics is the main driver. The only real explanation therefore is that 'bull' traders armed with concerning news reports in hand, are the main driving force. Traders have been rather quiet in the last few months, in fact most people failed to notice that Nymex near-month oil futures had hit a 2011 low of just under $76 a barrel in early October [when the European debt crisis was starting to rattle global recovery] but as I write this article they are currently hitting $97, with some analysts suggesting a price point above $200 a barrel. Oil at $200 a barrel is not sustainable, and the OPEC price point of $80-100 is where it should be sitting.

Although not well publicized OPEC has for several years depended on a policy that amounts to world inventory management. Its primary reason for cutting back on production in November 2006 and again in February 2007 was concern about growing OECD inventories. Their focus is on total petroleum inventories including crude oil and petroleum products, which is a better indicator of prices that oil inventories alone.

In 2011, OECD + China/India have been strategically increasing strategic oil reserves and have the capacity to operate for up to 90 days in case of a shock to the system. OPEC has already trimmed back its oil production outlook, saying it still expects output to increase, but by a slightly smaller 500,000 barrels per day in 2012 - 80,000 barrels below its prior forecast. The downward adjustment has been due to a weaker-than-expected driving season in the US and the ongoing sluggish economic performance in the OECD.

The world remains on shaky ground and consumers are already hurting, oil at $200 is not an option for many. It is also worth noting that any short term disruptions in output from Iran as a result of a strike will be met by US allies in the region including Saudi Arabia and the UAE.

In respects to the argument that 40% of the worlds crude oil passes through the strategically located Straits of Hormuz between Iran and Oman, and that any disruptions will be catastrophic, it is worth noting that the United States’ 5th Fleet is stationed in Bahrain and the last thing Iran would want to do, is to provoke the United States to directly enter the conflict, regardless of Israel’s actions. Again lending weight to the argument that any spike should be short term, provided the conflict does not escalate.
At a time when the global economy is learning to walk again after the GFC, unsustainable oil prices, even if they are caused by geopolitical concerns is not something we see as lasting for a sustained period.

It is also noteworthy that any attack on Iranian installations will not mean a full scale ground invasion, a theory which is further boosted by the drawdown of troops in Iraq and Afghanistan. All of this is also combined with a war weary American public and politicos, which despite support for Israel, do not want to see another long and protracted conflict, especially with an election year in 2012.

(The writer was commenting on the high stakes poker game that is the "Iran Standoff" and what it means for international crude-oil prices. He could be reached at

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