Expect the Unexpected with Iran This Summer
The IMF's outlook that oil prices will decline this year and through 2013 is “misguided.”
So said Kent on Monday, when he sat down with CNBC to discuss the ongoing negotiations between Iran and the West over Tehran's controversial nuclear program.
Despite sanguine sentiments spouting from a variety of sources earlier this week, Kent foresees greater uncertainty as a primary motif of the international oil markets this summer.
Iran has already thumped its chest, announcing it will cut oil supplies to Germany in July. This is viewed by some as a clever, yet risky, gambit in this greater game of political posturing over the EU-imposed embargo, announced in January.
The retaliatory posturing as Tehran continues its talks with Western nations has heightened the stakes. The EU continues to bootlessly struggle to guarantee crude shipments to at-risk economies like Greece, Spain, and Italy.
For now, Saudi Arabia has promised to fill the supply gap; however, the oil-rich nation will not guarantee any reduction in price to the European markets. That is just one spark in a chain of events that will lead to higher global prices.
And it will put one booming economy at risk.
Let's Be Honest: The Talks Will Break Down
Despite optimism from numerous policy wonks, three essentially non-negotiable items will lead to a breakdown in these discussions. According to Kent, the United States and the West must ensure that the following three events transpire in order to deem any negotiations as a success.
- There is a requirement “that all enrichment to 20% and 3% purity” of nuclear material must be stopped immediately.
- Iran must remove all currently enriched uranium from the country.
- Finally, Iran must dismantle its super-secret nuclear enrichment facility just outside of the holy city of Qom.
Iran likely will not be prepared to accept any of these mandates.
But it's the third point that really raises the stakes.
The nuclear facility about 20 miles north of Qom is completely non-negotiable, since Iran won't even admit the extent of the activities happening at this facility.
This is even more problematic because reports of its existence have been widely circulated since its creation, and Iran attempted to hide the facility and deny its existence for years.
But any potential military action against this facility would cause irreparable damage to the holy Shi'a city and potentially spark religious uprisings throughout the Middle East.
After the Breakdown
As talks break down and we approach the summer, tensions will increase by default.
And uncertainty will rise as we approach the embargo scheduled to begin July 1.
While the EU sticks to its guns, however, it hasn't quite figured out how to ensure delivery of crude to struggling economies the gap created by this embargo.
Enter Saudi Arabia.
The Saudis have assured that they will provide the necessary supply for now, but they have not guaranteed it at a particular price. And in a debt-ridden continent where few politicians are still willing to accept the gravity of the situation, it only provides a short-term solution without any stability in energy prices.
And, where there is short-term action, there is always reaction somewhere else.
While Europe may benefit from the ability to obtain crude from the Saudis, it could cause economic problems for another growing region of the world.
India is likely to lose the most if Saudi Arabia has to fill the supply gap. The loss of guaranteed supplies will likely spur an increase in the Asian premium for crude.
As global growth stammers along this summer, the availability of inexpensive energy sources threatens any nation attempting to maintain growth.
It's going to be a long, hot summer. The least we can do is profit from it.
[Editor's Note: Brent crude prices will only accelerate with global uncertainty running amok.
But if you were an Energy Advantage member, you'd already know the biggest trend in energy today, and, best of all, how to protect yourself against this uncertainty.
And we're smack in the middle of the biggest energy event to hit the markets in years. To hear about it, CLICK HERE.]