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What This Global “Texas Standoff” Means for Oil Price

by | published May 25th, 2012

It’s Iran again.

Actually, it has never stopped being about Iran, ever since the West passed heavy sanctions and the European Union decided to end all Iranian crude oil imports beginning July 1.

I know I keep going back to this issue, but it’s for one very simple reason.

The rising tension between Tehran, on the one hand, and Washington and Brussels, on the other, is still the single most serious geopolitical element impacting the global oil market today.

And now the matter is finally reaching a head.

This afternoon I’ll be on Fox Business to talk with journalist Ashley Webster about the Iranian crisis. (If you want to tune in, “hit time,” as they call it, is set for 2:20 p.m. Eastern.)

But I thought I would fill you in beforehand.

So here’s the gist of what I will be telling Fox this afternoon.

Even After Two Days of Meetings

Two days of meetings have just concluded in Baghdad, between Iran and the six major powers (the five permanent members of the UN Security Council, plus Germany). There was some spin applied in the rhetoric before and after the meetings, but the conclusion is strikingly clear.

Absolutely nothing was accomplished.

The next set of talks is scheduled to take place in Moscow on June 18 and 19, but time is running out.

Iran is now looking at losing one-quarter of its monthly oil exports, with no alternative markets for that oil in sight. That’s right – the Chinese have decided against becoming the “importer of last resort” for Iran. And their primary shipping insurers have knuckled under before the sanctions and are no longer covering Iranian crude consignments.

The sanctions have also made it difficult – on purpose – for Tehran to access international banking networks to exchange currency from the sales it does make. That means it costs Iran more to use indirect, and often shadowy, ways of moving money, squeezing even further the profits from sales.

Rather important for a nation whose national budget is dependent upon oil sales for 90% of its revenue…

Yet as we approach July 1, the imminent problems are not all on Iran’s side.

The EU is Going to Feel the Effects, Too

Eleven EU countries import oil from Iran each month.

For most of them, the transition to other suppliers is a possibility to make up the difference – especially imports from Libya, where oil has come back on line quicker than anticipated.

However, for the three European countries most affected, the situation is quite different. Unfortunately, these three nations are also the three southern-tier EU members (at least for the moment) with the most acute financial problems.

Greece has been importing at least 30% of its oil from Iran monthly; Spain 14%, and Italy 13%.

Saudi Arabia has agreed to make up the volume difference, but only through the first delivery cycle, and without guaranteeing any pricing floor. The EU still has not worked out how it will compensate for deliveries past that, should the embargo last for any length of time.

So what’s going to happen?

Iran believes Europe will have to blink first in this ongoing game of diplomatic “chicken.” So Tehran has a single objective in these talks: play for time.

And, oh yes, stronger sanctions are working their ways through the halls of the U.S. Congress, assuring that the situation for a recalcitrant Iran will only become worse.

Meanwhile, the effect on global oil prices will only become more acute as the embargo kicks in.

Oil may be trading at around $91 per barrel (WTI) right now.

But that’s temporary.

The only reason we have not seen this rise in prices taking shape earlier is because of the current European sideshows following the French and Greek elections. The Continental angst has created ripples of demand concerns on both sides of the Atlantic, promoting a short-term (and emotionally-led) retreat in oil prices.

The pricing reversal in the other direction will follow in lock-step with the collapse in the talks between Iran and the global powers.

Already, my Moscow oil contacts are concluding that nothing of consequence will take place there next month, either. Actually, some think the embargo may even help increase Russian imports to Europe.

Brussels, however, certainly does not want to become more dependent upon Russian oil, since it is already dealing with the problem of being overly reliant on Russian natural gas.

So, what is the likelihood that those talks will collapse? If I were handicapping that eventuality, I would currently put that collapse as a 90% probability. Why? Because both sides have put down demands that the other cannot meet.

During the initial April meeting in Istanbul, the Iranian delegation required that the West suspend their sanctions before Tehran would discuss its nuclear program. While the Vienna-based International Atomic Energy Agency (IAEA) is holding out some hope for a renewed round of inspections, we have been down that road many times before. It is a non-starter. The West will not agree to freeze the sanctions first.

For their part, the U.S. and the EU have laid down three non-negotiable requirements before they will annul the embargo and the sanctions. These require that Iran:

  1. end all purification of uranium (both to the 20% and 3% levels);
  2. move all uranium currently purified out of the country; and
  3. open up the super-secret and heavily fortified underground installation at Fordo near the sacred city of Qom to full international access.

Iran will never agree to the last two; probably not to the first one either.

Absent the rise of another Neville Chamberlain and another Munich-like appeasement, we have a Texas standoff here.

And that assures increasing tensions, rising volatility in prices and a very interesting summer in the oil markets.

Sincerely,

Kent

P.S. If you still haven’t seen this, I just raised my target price for oil – significantly. Here are my new projections.

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  1. jrj90620
    May 25th, 2012 at 11:29 | #1

    Seems to me that Iran,if they depend as much on oil exports as you say,will figure out some way to continue exporting.Maybe make some false promises. No Korea lies to get what it needs.

  2. champak
    May 25th, 2012 at 12:00 | #2

    WHY are these ‘ Wild Cat Countrys ‘ Not Given THORIUM Power Generation
    instead of Uranium Power ? It is NOT Possible to make Wepons Grade Material with a Thorium Reactor. If the ‘ISSUE’ is ‘Power Generation ‘ then this is a No Brainer Solution, However if the ‘Agenda’ is ‘Building
    W.M.Ds’ then that is a ‘ Different Story’ than what we are being told.

  3. Nelson Chenaur
    May 25th, 2012 at 12:10 | #3

    Why don’t you just tell everybody Iran is not self sufficient in food.

    Iran must sell its oil to pay for the food they eat. It has not been self sufficient in food since the Shah won it war with the Nomads in about 1905.

  4. Dan
    May 25th, 2012 at 12:12 | #4

    So, with oil down and the oil stocks down right now…..where should we be putting our money today….we are out of most stuff right now??

  5. May 25th, 2012 at 14:39 | #5

    very intresting article kent, but one side you did not mention is that iran has friends,it is an empire of evil so can count on help from russia an red china, both have sworn to destroy the united states

  6. dale
    May 25th, 2012 at 15:48 | #6

    I don’t believe anything significant will come of an embargo, IF it even occurs. doubtful in my opinion. Iran has no choice but to sell their oil to someone, somewhere, and will do whatever is necessary to ensure that happens.

    The global shipping industry is about profits first, and will run tankers anywhere the money is. No matter how many different flags they have to sail under. The Iranians will find a market, and someone will ship it. The reality looms large that Iraq will become the De-Facto supplier of Iranian Oil. How’s that for a boomerang? Also how much can anyone trust China, Russia, and India to abide by an agreement they could care less about? My answer is not much.

    The U.S. and the G-8 have already publicly stated that they are united and will release their reserves to overcome any shortfall. Let’s face reality, the EU-US put on a meaningless show of solidarity trying to convince Iran to offer anything in the way of concessions.

    There is no way, in my honest opinion, any type of military action will take place. Israel will not act alone, America and Europe have no stomach for iniating further conflicts, and the rest of the world would support Iran even if they were attacked.

    The world is in a deepening recession, they will not risk a depression given Iran’s stated goal of peaceful nuclear ambitions. The objective is to retard their progress, not dismantle it. Expect a 12th hour agreement that is satisfactory for everyone except Israel.

    Price of oil isn’t going anywhere dramatic anytime soon.

  7. May 25th, 2012 at 17:19 | #7

    And very little of this has to do with the current bubble in oil prices.

    What does make a difference is the fact that refineries have to go offline at a record pace for repair and upgrades. need I remind all you bulls that refinery construction has been artificially retarded for nearly thirty years to encourage the price of oil to go up outside of general economic pressures. Deliberate artificial scarcity is the reason for this bubble and once the world’s governments get fed up with it they will push regulations that lower the price of oil like it or not.

    You yourself said within the past month this was going to happen.

    With all that said, something has got to break. Oil supplies are shrinking and energy demands are growing. Rather than focusing on how we can squeeze the last profit out of a declining asset it would be much better to start focusing on new sources of energy that are only emerging. The bull route is a dangerous one for traders and will only get more dangerous as the peoples and governments of the world get more desperate for energy resources.

    Remember no Texas standoff would be complete without a large assortment of weaponry to kick off the festivities and the world has plenty of weapons to play with.

  8. Al Novotny
    May 25th, 2012 at 17:28 | #8

    All I know is, I’m not only not Texas rich, I’m Arizona poor. LOL. I think I’ll probably die before that happens.

  9. getoffforeignoil
    May 25th, 2012 at 19:53 | #9

    Maybe that is why oil companies are investing in algae production?

  10. Bryan
    May 31st, 2012 at 05:59 | #10

    @champak Exactly….That is why the US is convinced Iran is working toward weapons. Its the classic case of “Do as I say and not as I do”. Why are ALL reactors in the US uranium powered? Because the US gov processes out the plutonium they produce for weapons. Same with the Fukushima reactor in Japan. If the US declares this fact to prove their point, their double standards would be exposed for the world to see!!

  11. James M. Brockway
    June 4th, 2012 at 08:40 | #11

    How much of a total retirement portfolio do you believe should be invested in oil stocks?

    How much of a total investment portfolio do you believe should be invested in oil stocks?

    Which 5-10 oil stocks are you recommending at present?

    Thank you,
    Jim Brockway

  12. Sir2You
    June 11th, 2012 at 23:49 | #12

    @champak
    Absolutely! Why is noone discussing Thorium, nor are they talking about the alloys of uranium rods that make meltdown impossible? This is either media insanity, incompetence, or malice.

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