Yet again, Iran has proved capable of driving the oil price up and Brent has now clearly breached a two standard deviation move from the mean over the last year.
However, while the USD price of Brent remains USD 23/bbl below its all time nominal peak from July 2008, it is now above those peak levels in RUB and GBP terms and within a whisker of the peak in EUR terms. Only in Asia are local currency prices considerably below the 2008 peak, notably for Japan and China, and less so for India. While that might be a boon for an oil exporter such as Russia, it is likely to prove a drag on global growth the more it is sustained.
On a shorter time frame, Brent in USD remains 3% below the April 2011 high point, but it is 1-8% higher in RUB, EUR, GBP and INR terms although cheaper by 7% and 8% in CNY and JPN terms, respectively. All countries have seen oil price rises since the start of the year, with increases in the range of 5-19%. The latest impetus to the oil price was the news that IAEA inspectors had been refused access to the Parchin military complex where the IAEA has reason to believe that Iran might have tested the high explosive initiation system required to detonate a nuclear device.
It appears to us that the market perception of military action in the near term against Iran over its nuclear activities is rising sharply. While we remain sceptical about such an eventuality, at least for this year, that is not the grain of the market at the moment. It will take much clearer evidence that supply is substantially in excess of demand and that inventories are building, which will take time, or significant steps to reduce the perceived risk of an overt military outcome, before prices are likely to relax, we expect.