In our view, Iran was a key driver behind the strength of oil prices during 2012. We expect that the Iran factor will probably have less potency in terms of its impact on oil prices this year because Iranian production has slumped, but now appears to be stabilising, global oil inventories have rebuilt significantly and global spare capacity appears likely to increase.
According to the IEA, by the end of 2012, Iranian crude production had fallen from 3.45mmb/d in December 2011 to 2.70mmb/d by December 2012 with crude exports down to just 1.2mmb/d. It would therefore probably require markets to be much more certain that the threat of military action against Iran was going to turn into a reality in order to make the Iranian nuclear issue a significant positive driver to the oil price than was the case last year, given the easing in oil market fundamentals and the lessening of Iran’s importance to global oil exports.
We also believe that it is worthwhile paying attention as to how the nuclear issue might develop since the terms of the negotiations appear to us to be shifting. In particular, rhetoric from Iran’s leadership now clearly recognises that the impact from sanctions, and hence the pressure on Iran, is significant, as is also reflected in the collapse in the currency. While the outcome of the US Presidential election raises the possibility that the US will be more open to a negotiated settlement with Iran and the outcome of the Israeli elections might have weakened Prime Minister Netanyahu’s ability to keep the risk of the Iranian nuclear threat to the fore. Moreover, should as yet unsubstantiated reports of a substantial explosion at Iran’s Fordow nuclear enrichment site prove well founded, we would expect that to lessen tension over the nuclear issue, as it might represent a delay, perhaps a significant delay, in the nuclear progress Iran has been making. Finally, Iran is scheduled to hold Presidential elections in June and while President Ahmadinejad has already largely been
IAEA discussions with Iran including over the ‘modalities’ of how to resolve the outstanding issues related to Iran’s past weaponisation activities appear quite active with a further meeting set for 13 February. There will also likely be a further IAEA nuclear inspection report toward the end of February, ahead of the Board of Governors meeting scheduled for early March. That and the confirmation of Chuck Hagel as the new Secretary of Defence for the US, seen as less supportive of Israel’s positions on Iran by many (assuming he is confirmed), could provide clearer indicators of whether the