(Robert Campbell is a Reuters market analyst. The views
expressed are his own)
By Robert Campbell
NEW YORK, July 13 Western diplomats can hardly
believe their luck. Sanctions against Iran's oil exports are
proving more effective than hoped yet the impact on the price of
crude has so far been minimal.
It was not supposed to be this way. A decade of Iranian
intransigence over its disputed nuclear program had finally
eroded Western patience. Sanctions were supposed to be a
painful, but necessary step.
Spurred by fears of a wider Middle Eastern conflict if
Israel acted unilaterally to strike at Iran, Western governments
decided to endure the consequences of tougher sanctions if they
offered a peaceful route to resolving the issue.
But so far, the pain has mostly been inflicted on Iran.
Consider the situation in February after the European Union
adopted its import ban. The International Energy Agency warned
up to 1 million barrels per day of Iran's 2.6 million bpd of oil
exports could be affected by tighter Western sanctions.
Brent crude had risen to a six-month high in early February,
fueled by geopolitical worries, although the market was taking
the looming sanctions impact "in its stride," according to the
Brent would later gain to nearly $130 a barrel, driven up by
a combination of optimism over global economic growth and fears
that this growth would drive up oil demand just as Iranian
But fears of a slowdown in global economic growth have sent
the benchmark futures contract back down to near $100 a barrel,
roughly where they were when Europe first publicly discussed a
ban on imports of Iranian crude.
This result has been due more to luck than foresight. At the
time the European ban began to be seriously discussed, Western
governments believed a large release of strategic oil stocks
would be needed to calm the oil market.
Now due to the global slowdown, and extra oil supplies from
Saudi Arabia, the loss of some Iranian oil production has so far
not affected the balance between crude supply and demand.
The benign situation could easily change, however. Oil
traders are already nervous that the sanctions may working a
little too well and flip the oil market into a supply deficit.
Restrictions on buying shipping insurance in European
markets and stepped up measures by the United States against
Iran's international financial transactions have greatly
complicated Tehran's oil exports to major customers in Asia.
The current oil price scenario doubtlessly came into the
equation as the United States weighed how tightly it would
enforce its own sanctions regime.
If oil had been near $140 a barrel it is conceivable that
Western governments might have overlooked some outlets for
Iranian oil. After all, many market observers assumed earlier
this year that supply and demand might only remain in balance if
the West tacitly permitted Iran to export much of the crude it
was not able to send to Europe.
Instead, as we saw last week, countries like Kenya find the
sanctions complicating deals for Iranian crude.
Right now the risks to oil demand growth remain
overwhelmingly on the downside. And the supply situation is
forecast to be favorable.
A number of OPEC members outside of Iran will add new
capacity next year. And non-OPEC oil production should move
higher through 2013.
Little wonder the IEA's new 2013 oil market forecasts look
Global demand is seen averaging 90.9 million bpd, up 1
million bpd from 2012, but the amount OPEC will need to pump on
average to balance the market should fall 400,000 bpd to an even
30 million bpd.
Moreover OPEC spare production capacity is expected to edge
higher by 245,000 bpd as growth in other countries outweighs an
expected 570,000 bpd decline in Iranian output capacity.
So far, so good, right? Next year should see Iran's
influence over oil markets diminish while soft demand growth
gives supply a chance to catch up.
This scenario assumes a great deal. Global oil demand does
not have to grow much faster than expected to eat away at that
modest gain in OPEC spare capacity.
Nor is this outcome so far fetched. Despite the global
economic slowdown, the IEA's latest forecast for 2012 oil demand
is identical to that published in February: 89.9 million bpd.
Fourth quarter demand has been revised down to 90.9 million
bpd, but that is only 300,000 bpd less than the February
The same goes for supply growth. A few project delays or
faster-than-anticipated decline rates could diminish the actual
growth in global oil supplies.
A similar situation holds within OPEC. Although production
capacity growth is expected from stable countries like the
United Arab Emirates, Libya and Iraq are also expected to make
But neither of the latter two countries can be described as
politically stable. Unrest could force the postponement of new
Nor can problems elsewhere in OPEC, or a bigger than
expected fall in Iranian oil production be ruled out.
PAIN ONLY DEFERRED?
The problem with sanctions is that they are quite hard to
lift. Once in place they become totems of prestige.
Look no further than the history of sanctions against Saddam
Hussein's Iraq, which were in place for more than a decade and
were no where near being lifted when the United States moved to
topple the regime.
So too with Iran, I suspect. The West would pay a heavy
diplomatic price if a surging oil prices forced a dilution of
the sanctions regime.
However the impact of a lengthy standoff between Iran and
the West will be the destruction of a large part of Iran's oil
Without investment and modern technology, Iran's aging oil
fields will struggle to sustain even the modest output expected
Yet it is currently very hard to imagine a situation where
the nuclear issue is resolved to the satisfaction of all
parties, allowing a major boost in Iranian oil investment.
This may not be a problem now, but could easily become one
if global growth shifts into a higher gear.
(Editing by Andrew Hay)