Iran continues to drive oil price

Since the start of Iran’s naval exercises in the Strait of Hormuz at Christmas time and multiple events since (most recently the suggestion that Iran might have pre-emptively cut supplies to some EU members), Iran, its nuclear programme, related sanctions and Iran’s response to them have been the main driver to oil prices rising almost USD 17/bbl to trade within a whisker of USD 120/bbl, we believe.

While Iran continues to talk a good game to boost the price, so far as we can tell, there has been no actual impact on volume supplied to the market. A case in point is the reported pre-emptive cut in supplies to six EU members. That put USD 1-2/bbl onto the oil price when the story first broke which did not all come off when the story was denied by the Iranians.

In a similar vein, Iran’s alleged progress in its nuclear programme looks incremental at best and will in any case get more clarity when the IAEA issues its next report, which we expect to be out at the end of this month since the next IAEA Board meeting is scheduled for 5-9 March. The November 2011 report put the number of operating centrifuges at 6,208.

While this confirms how sensitive the market is to any threat of disruption to oil supplies connected with Iran, we continue to believe that bluster alone will not support the oil price in the face of deteriorating fundamentals forever. We also note that Iran has now formally responded to the letter sent on behalf of the P5+1 group by Catherine Ashton, the EU’s foreign policy chief, last October which might open the way to substantive negotiations over Iran’s nuclear programme for the first time since mid 2010.