Europe fears of Iranian reaction to oil embargo: JP Morgan

The additional sanctions against Iran, which were adopted by the EU, can have a significant impact on the global oil prices, the analysts at the U.S. bank JP Morgan say.

“The main argument against such sanctions is that if they have a significant impact on Iranian finances, they could also have a significant impact on global oil prices, which would be unwelcome in the current fragile state of the global economy” JP Moragan’s analysts said in their weekly oil market report.

JP Morgan’s analysts believe that the further sanctions against Iran would undoubtedly shock the oil market. “While we are confident that it would trigger the rapid use of strategic reserves, the initial market shock could be in the $20 to $30/bbl range,” they said.

According to the U.S. Energy Information Administration (EIA) as of January 2011, Iran has an estimated 137 billion barrels of proven oil reserves, 9.3 percent of the world’s total reserves and over 12 percent of OPEC reserves.

In 2010, Iran exported approximately 2.2 million bbl/d of crude oil. Last year Iran’s net oil export revenues amounted to approximately $73 billion.

“The closer more stringent oil market sanctions come to reality, the greater the potential for Iran to become the first mover,” Lawrence Eagles, head of oil strategy at JPMorgan in New York says.

Iran is the world’s third-largest oil exporter, behind Saudi Arabia and Russia, selling about 2.2m barrels a day. The EU last year bought about 450,000 b/d, or one-fifth of Iran’s sales. Italy and Spain accounted for about 70 percent of the EU imports, with the rest made up by Greece, France, Germany, the Netherlands and the UK.

“Hypothetically, if Iran halted exports to key countries, pre-empting the imposition of tighter sanctions, a supply loss could come quicker than the market expects and would, in our opinion, elevate associated concern,” Eagles wrote in a note to clients. He is not alone in thinking about Tehran’s options. Oil executives have also said they are concerned about the possibility Iran could move first.

Europe’s calculations about the timing of an embargo gives Iran that opportunity.

If today Tehran announces its own embargo, potentially wrongfooting the EU and catching the oil market off guard. Of course, such a move carries risks for Iran, too.

Tehran could try to split the emerging consensus in Europe about the embargo, announcing a selective ban. It could impose an embargo against France, Germany and the UK – the main forces behind the plan – and spare Italy, Spain and Greece, its biggest clients. True, European solidarity might prevail, but if oil prices rise sharply – as is very likely – do not count too much on it, particularly with economies heading into recession.

Efforts to impose massive new sanctions on Iran saw a surprising failure last weak when the European Union failed to impose a full oil embargo on the nation.

France blamed the failure to impose the embargo on Greece, which buys considerable oil from Iran.

So far the anti-Iran sanctions have actually bolstered government-owned businesses, which were able to better circumvent the measures. The oil embargo has been controversial because while officials agree it would really stick it to Iran, it would likely also do massive damage to the world’s energy market at a time when the global economy is still struggling.