(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 IEA.
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 shipments withered.
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 fairly benign.
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 forecast.
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 large contributions.
But neither of the latter two countries can be described as politically stable. Unrest could force the postponement of new projects.
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 export capacity.
Without investment and modern technology, Iran's aging oil fields will struggle to sustain even the modest output expected in 2013.
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)