The most likely scenario is that the EU embargo will result in higher oil prices.

“Fitch believes that the EU ban on Iranian oil is largely credit neutral for EU integrated oil and gas companies. The cash flow impact of the ban may be negative for refining operations, but should be positive or neutral for upstream operations.” said Arkadiusz Wicik, Director in Fitch’s European Energy, Utilities and Regulation team.

The most likely scenario is that the EU embargo will result in higher oil prices. However, prices may not necessarily increase markedly from current levels as some of the risks related to the EU ban on Iranian oil appear factored in already.

Southern European countries including Italy, Spain and Greece are the largest importers of Iranian crude oil in the EU. A rise in oil prices could be further bad news for these countries, which already face a weak economic outlook in 2012.

Iran to Halt European Oil Exports?

Iran’s parliament have today drafted legislation calling for the government to halt oil exports to Europe until the EU cancels its planned ban on the country’s crude, Fars news agency reported, citing a lawmaker.

The bill would also require Iran to embargo imports from countries participating in the EU ban, Nasser Sodani, the deputy head of the parliament’s energy commission, said yesterday, according to the state run news agency. Iranian lawmakers planned to debate the bill in parliament today, Fars reported on January 27.

If agreed Sunday, Iran’s move would halt an estimated 600,000 barrels a day crude exports into the EU, leaving European refiners in countries such as Greece, Italy and Spain scrambling at short notice for alternative oil supplies, pushing up prices. The EU had envisaged a more phased approach that would give buyers time to source other oil flows.

With no sign that the West is likely to ease the sanctions pressure over the Islamic Republic’s nuclear program, the rhetoric from both sides is likely to keep oil market investors on their toes, analysts said.

Earlier Friday, Israel’s Defense Minister Ehud Barak, speaking in Davos, praised recent moves to tighten the sanctions on Iran but said that still more steps are needed.

Barak said sanctions should be accelerated and more steps should be taken against Iran’s central bank and its oil trade.

EU Oil Embargo

EU foreign ministers will meet on January 23 to consider an Europe wide oil embargo on Iran. The approved, the EU’s 27 members states would be prohibited from concluding new oil contracts with Iran or renewing any that are due to expire.

Iran’s OPEC Governor Mohammad-Ali Khatibi, in an interview with Shargh, questioned whether OPEC had as much as 4 million barrels a day in surplus capacity. He said Arab crude oil producers would be able to provide oil of a grade similar to Iran’s crude, though such an effort would prove costly for them, the newspaper cited Khatibi as saying.

“If oil producers bordering the Persian Gulf show the green light to replace Iran’s crude with theirs, whatever happens, they will be key players in a move to sanction Iran’s oil.” Shargh, the Tehran based newspaper cited Khatibi as saying in an interview.

Western sanctions are being ratcheted up, shaking Iran’s oil dependent economy.

Military pressure is building, with the US and the UK deploying warships to the Gulf, and reports suggesting Israel could be poised to launch air strikes against Iranian nuclear sites.

A covert campaign has also been stepped up, as evidenced last Wednesday by the murder of a deputy director of Iran’s main uranium enrichment plant, the fifth Iranian scientist to be targeted in Tehran by motorbike mounted assassins in the past two years.

Furious Iranian officials say they are looking at ways of to hit back against those they see responsible for the attacks.

They are also threatening to close the Strait of Hormuz in the Gulf if extra sanctions bite, cutting off the transport of 20 percent of the world’s oil. The US has said that would cross a red line, prompting likely military action.

Meanwhile, Britain’s foreign secretary said Sunday that European nations will intensify pressure on Iran over its nuclear program, but insisted the West wasn’t pressing for military action.

William Hague told Sky News television that he believed the EU would agree tough new sanctions against Tehran’s oil sector later this month, and would continue to look for peaceful methods of persuading Iran to ditch its pursuit of a nuclear weapon.

Khorasan daily reported Sunday that Ali Ashraf Nouri says the strategic decision has been made by Iran’s top authorities.

Practising Strait of Hormuz Closure

Iran’s next round of Persian Gulf naval drills will practice the armed forces ability to close the Strait of Hormuz, a lawmaker on parliament’s national security committee was cited by Mehr News as saying.

Iran’s elite Revolutionary Guards Corp will start naval exercises on 27th January in the Gulf with the aim of enhancing the country’s ability to close the chokepoint into that body of water “in the shortest possible time when the situation requires it.” Mehr cited Esmaeil Kowsari, a member of parliament’s National Security and Foreign Policy Committee, as saying in a report published on Saturday.

Iran threatened last month to shut the Strait, a transit point for a fifth of oil traded worldwide, if sanctions are imposed on its crude oil exports.

Effect of Sanctions

The Obama administration will implement the new US sanctions gradually over the next six months, however, the American measures, combined with a pending EU ban on importing Iranian crude, will wreak havoc on Tehran’s energy exports, which generate the overwhelming majority of the regime’s foreign exchange.

Beyond Europe, major Iranian customers such as Japan and South Korea will co-ordinate carefully with Washington. China is already cutting back its purchases in a bid for considerable price discounts.

For the oil markets, the net effect of the latest sanctions against Iran and the tensions will bring intensified volatility and sustained higher crude oil prices.

UK Destroyer on Route

Meanwhile, the United Kingdom on Saturday revealed that it is planning to send warships to the Persian Gulf.

The UK Ministry of Defense described the deployment of the HMS Daring as “long-planned” and “entirely routine.” The destroyer will replace a frigate stationed in the area, it said.

India to Pay Iran for Crude Oil in Rupees

India has announced today new plans to pay for Iranian crude oil it imports in Indian rupees, opposed to US dollars.

A senior Indian government official, speaking on condition of anonymity, said the issue will be addressed when a multi disciplinary team visits Tehran on January 16 to discuss uninterrupted supply from the major oil producer, the Press Trust of India reported on Sunday.

Under the proposal, the National Iranian Oil Company (NIOC) will open an Indian rupee account with Indian banks, and can use the money to purchase non strategic commodities like railway imports. However, the NIOC cannot use the money to invest in India or buy shares in Indian companies.

India satisfies about three quarters of its crude oil demands through imports and Iran is its second largest supplier after Saudi Arabia.

World Chaos Within 24 Hours

Rear Adm. Ali Fadavi, of Iran’s Islamic Revolutionary Guard Corps, said last month the world could not last 24 hours without Persian Gulf oil, and that Iran is capable of closing the strait.

“Today, out of the 1,300 billion barrels of oil in the world, 800 billion barrels are in the Persian Gulf,” Fadavi commented.

The US Navy said the threat to block the strait is unacceptable, as the flow of goods and services is vital not only to the region but to the world.

Several countries within the EU are heavily reliant on oil imports from Iran, and none more so than economically struggling Greece, which currently imports 30 percent of its domestic oil from the country, according to the International Energy Agency (IEA).

Greece Economic Collapse?

Greece’s economy is already mired in deep recession and could feasibly collapse entirely if the sanctions were imposed, according to Paul Stevens, economist and emeritus professor at Dundee University, Scotland.

“Let’s assume the European Union is stupid enough to go along with the US in imposing sanctions on Iran. That would only mean 250,000 barrels of heavy sour oil not coming into the EU.” Stevens said.

“But the impact that would have on countries like Italy and Greece would be enormous, and the Greeks are not going to slit their own throats for the sake of an EU sanction when Iran is the only country willing to offer them oil on favorable terms. It would utterly destroy the Greek economy.”

However Greece, increasingly dependent on imports of Iranian oil, will not break ranks with its EU partners to impose an oil embargo on Iran at a meeting this month, Greek government sources said on Tuesday.

“If the European Union decides to impose the sanctions, Greece will join them.” according to an official.

Greece Default?

Greece and Italy will default on their debts in 2012 but will not abandon the eurozone, as the continent’s policymakers will find away to keep the currency zone from falling apart, says Byron Wien, Vice Chairman of Blackstone Advisory Partners.

Worried that Athens will default on its debt, traders have pulled the plug on supplies and banks refuse to provide financing. Greece has stopped buying crude from Russia, Azerbaijan and Kazakhstan.

In the second quarter of 2011, Greece met 35 percent of its oil import needs from Iran, buying 111,000 barrels per day.

Search For Greek Oil

Earlier this week, Greece launched a tender inviting investors to search for oil in northern and central parts of the country, aiming to cut its energy imports bill and secure steady revenues in the long term.

Greek Minister Yiannis Maniatis has announced that he expects the first oil rig to be established before the end of 2012, as the government speeds forward with plans to exploit oil and gas reserves worth 25 billion euros.

Greece’s untapped oil reserves are estimated to hold 250 million barrels of oil worth around 25 billion euros. The government has been aware of the reserves for 15 years but failed to exploit them. According to the energy ministry there is already interest in the invitations to invest.

The prospective embargo from the EU, along with tough US financial measures signed into law by President Barack Obama on New Year’s Eve, form a concerted Western campaign to impose sanctions over Iran’s nuclear programme.

Greece Agrees to Sanctions

Diplomats said EU envoys had held talks on Iran in the last days of December, and that any objections to an oil embargo had been dropped, notably from crisis hit Greece which gets a third of its oil from Iran, relying on Tehran’s lenient financing. Spain and Italy are also big buyers.

“A lot of progress has been made,” one EU diplomat said, speaking on condition of anonymity. “The principle of an oil embargo is agreed. It is not being debated any more.”

The embargo will force Tehran to find other buyers for oil. EU countries buy about 450,000 barrels per day (bpd) of Iran’s 2.6 billion bpd in exports, making the bloc collectively the second largest market for Iranian crude after China.

The news caused a spike rise in oil prices, with Brent crude peaking at nearly $114 a barrel in intraday trading, up nearly $2 from Tuesday’s close.

Tehran insisted it would have no trouble: “We could very easily replace these customers,” said S. M. Qamsari, International Director of the National Iranian Oil Co.

But the new US sanctions have already made it difficult for Iran to keep the customers it has, and could force it to offer steep discounts to countries willing to risk doing business with it, hurting its revenues. Biggest trading partner China, driving a hard bargain, has cut its order of Iranian oil by more than half this month.

Unilateral Sanctions

“The principle of an oil embargo is agreed. It is not being debated anymore,” one EU diplomat said on condition of anonymity on Wednesday. Although the sanction has been agreed on in principle, the EU governments have not yet decided on a date to put the embargo in place.

The anti Iran move by the EU came after the United States, Britain, and Canada imposed unilateral sanctions on the Islamic Republic’s energy and financial sectors over Tehran’s nuclear program.

Alternative Supply Route

Iran has alternatives in place to let it cope with a threatened European Union embargo on its oil and increased US pressure, and plans to keep up exports of some 2.3 million barrels per day this year, a senior Iranian oil official said.

Tehran had already considered different routes if that were to happen, S.M Qamsari, International Director of the National Iranian Oil Co said from Tehran shortly before the report on the EU stance emerged.

“We could very easily replace those customers,” said Qamsari. Some, but not all, of any displaced volume could move into China as well as other Asian countries and Africa, he said. Iran was unlikely just to store crude on tankers as that was only a short term solution.

He said he expected shipments would remain unchanged this year and the volume of term, or annual, contracts was unchanged.

“We’ve got very high demand from our lifters, so we have the same quantity in our term contracts,” Qamsari said.

Roughly 30 percent, or just under 700,000 bpd, of Iran’s oil steams west of Suez, he said. More than half that volume is shipped to Europe, roughly 200,000 bpd goes to Turkey and the remainder is routed into Africa.

The International Energy Agency estimates Iran exports about 450,000 bpd to the EU.

The NIOC official said Europe’s longstanding buyers of Iranian crude, among them France’s Total and Italy’s Eni have voiced concern about potential EU sanctions, but had yet to cut back on contractual supplies.

Any punitive moves by Brussels could cause European consumers to suffer through higher prices at the pump, he said.

Latest WTI Oil Price

US Light crude oil futures for January 2012 delivery was trading at $100.07 a barrel, 07.19 GMT this morning in electronic trading on the NYMEX.

The US oil contract closed yesterday’s trading session at $100.00 a barrel, $1.98 higher, or 2 percent.

OPEC Meeting

OPEC appears set to reach consensus over maintaining its official output quota at a meeting in Vienna today, as data showed that the cartel’s crude oil production was at the highest level for more than three years last month.

Kuwait’s Oil Minister Mohammad al-Baseeri said OPEC was likely to keep its production quota unchanged as the market was balanced and crude prices stable.

Analysts widely expect OPEC, which supplies a third of the world’s crude oil, to maintain its official output target of 24.84 million barrels per day, where it has stood for almost three years.

But with the IEA estimating that actual OPEC production hit 30.68 million barrels of oil per day in November, the highest amount in more than three years, OPEC may decide to issue a statement promising stricter compliance with its quotas.

Iran – Strait of Hormuz

WTI and Brent oil price jumped more than 3 percent in just minutes yesterday afternoon on a market rumour that Iran may close a major oil shipping channel, but then pared some gains as the rumour proved untrue.

Iranian MP Parviz Sorouri of the Majlis National Security and Foreign Policy Committee said “We will hold an exercise to close the Strait of Hormuz in the near future. If the world wants to make the region insecure, we will make the world insecure.”

The comments, picked up by the quasi official Iranian Student News Agency, and reported by the Tehran Times, were later complemented by a statement by the Iranian Foreign Ministry noting the Strait remains open.

The strait, located between Iran and Oman, is the most important oil shipping channel in the world.

Later, an Iranian official later dismissed the rumour, and a spokeswoman for the US Navy’s 5th fleet in Bahrain said shipping traffic in the strait was flowing normally.

“Rumours have a way of spreading around, and in this age of electronic markets, when you get something that starts to push prices up quickly, it triggers the stops and you get these explosions in prices.” said Tom Bentz, director of BNP Paribas Prime Brokerage.

“If there is a downward trend for a longer period, we should think about an emergency meeting.” Iran’s OPEC governor, Mohammad Ali Khatibi said. He declined to offer specific a floor price that should prompt a meeting.

But others are starting to put a firm floor on the price they will deem unacceptable. “Some OPEC member states have already started bilateral consultation on slipping oil prices.” an Iraqi oil official said.

Libya and OPEC Quotas

Meanwhile, OPEC member countries which boosted oil production to compensate for the loss of Libyan supply earlier this year must reduce output as Libya returns to world markets, Khatibi said on Wednesday.

Khatibi, said the continuing global economic crisis would have a negative effect on oil demand.

He predicted that Libya would soon be exporting some 400,000 to 500,000 barrels per day of crude and called on OPEC producers to rein in oil output.

“When oil demand falls and supply remains the same, oversupply can affect prices and it is necessary to manage the supply.” Khatibi said.

Saudi Oil Output nears 10m

Several OPEC members boosted oil output in recent months as oil prices rose and as the uprising in Libya slashed Libyan production from close to 1.6 million barrels per day to virtually nothing.

Saudi Arabia accounted for the biggest increase in oil output and is currently pumping around 9.8 million barrels per day, or 1.8 million barrels per day more than its normal quota.

Latest Brent Oil Price

In London, Brent crude oil futures for October 2011 delivery was trading at $112.00 a barrel, 06.25 GMT this morning on the ICE Futures Exchange. The October Brent futures contract expires today.

The more active November Brent contract was at $109.29.

Weaker Economic Outlook – OPEC

OPEC has again cut its forecast for global demand for oil based on a revised economic outlook for the US. The new estimate was cut by 150,000 barrels a day for the remainder of the year, and 40,000 barrels a day for 2012.

“Uncertainties in the oil market are increasing at a time when the recovery of the global economy is losing momentum and is becoming less evident. Over recent months, a deceleration of economic growth was observed in almost every major economy.” OPEC said in its September monthly oil market report.

OPEC’s oil production in August reached its highest level since November 2008, however, the average selling price of its crude fell that month by the most in 15 months, as fears about the future of the global economy weighed on the market.

“The weaker economic recovery is negatively impacting oil demand with data from key markets, the US and China, already coming in lower than expected.” OPEC said. “Required crude supply has been revised down in the third and fourth quarters, at a time when OPEC crude oil production continues to increase.”

“The impact a weak US economy is going to have on the oil price is probably largely factored in but if the outlook gets gloomier you’ll probably see more response there.” said David Land, head of analysis at CMC Markets, Sydney.

Brent’s premium to US WTI crude oil traded down to $22.30 a barrel, after its surge to a record above $27 last week.

Latest WTI Oil Price

US Light crude oil futures for September 2011 delivery was trading at $81.71 a barrel, 07.10 GMT this morning in electronic trading on the NYMEX. The US contract ended yesterday’s trading session at $81.75.

Stock Markets Recovering?

Asian stock markets jumped Wednesday following a surge on Wall Street triggered by a US Fed pledge to keep interest rates super low for the next two years to help the ailing US economy.

However many analysts believe investors will remain wary about the US central bank’s expectation that the US economy will remain weaker for longer than previously forecast.

World stock markets have been falling since the start of this month on fears of a slide back into recession for the US, as well as the ongoing eurozone debt crisis. WTI oil prices rose to near $82 a barrel, while the dollar slid against the yen and the euro.

OPEC and EIA Forecasts

OPEC cut its crude oil demand forecasts for 2011 and 2012 amid economic worries, the cartel now expects oil demand to increase to 88.1 million barrels per day, down 0.15 million barrels per day from June’s forecast, this year and then to 89.4 million barrels per day, down around 0.1 million barrels per day from June 2012.

Meanwhile, The US EIA said in its Short Term Energy Report that it reduced crude oil price forecast to $95.71 for 2011 and 101 for 2012, down from corresponding forecasts of $98.43 and $102.5 made in June.

Latest WTI Oil Price

US Light crude oil futures for August 2011 delivery was trading at $97.29 a barrel, 08.10 GMT this morning in electronic trading on the NYMEX.

While OPEC thinks global demand will continue to increase this year to the highest levels ever, however the monthly report it released on Tuesday said that demand won’t grow as much as it previously expected.

OPEC 2011 Oil Demand Forecast

OPEC forecasts that daily world oil consumption will increase in 2011 by 1.36m barrels, down from a previous estimate of 1.38m barrels to an average 88.18m barrels.

OPEC said it cut demand expectations as the unsteady global economy has added risks to the forecast. The report also said it’s hard to estimate how much oil the US will consume this year.

OPEC last met in Vienna in June, when its members failed to agree on crude output limits for the first time in at least 20 years. “It was one of the worst meetings we’ve ever had,” Saudi Oil Minister Ali al-Naimi said.

Latest Brent Oil Price

In London, Brent crude oil futures for August 2011 delivery was trading at $106.00 a barrel, 05.55 GMT this morning on the ICE Futures Exchange. The contract closed yesterday’s trading session up 0.7 percent at $106.44 a barrel.

OPEC Member Complaints

OPEC member country Iran sees no need to supply the oil market with extra crude oil, Oil Ministry caretaker Mohammad Aliabadi told reporters on Monday, adding he was concerned about the principle of IEA consumer nations releasing strategic reserves.

“The market is under normal conditions. Supply and demand are desirable. There is no additional need for supply in the market. Why they are not abiding by those principles is really a big question for us. We believe that prices should be set by the market itself.” he told reporters before an OPEC meeting with EU officials for their annual exchange on energy issues.

To put the latest IEA move into perspective, the US will be releasing 30 million barrels of oil reserves, which is roughly five percent of the total US oil stocks.

IEA officials said they would consider whether more oil should be released in a month. This is only the third time an administration has tapped into US oil reserves since 1973 in response to the Arab oil embargo. The other two times were in response to a war and natural disaster…

Last week’s announcement of the oil release program was made by IEA, buy you can’t help but wonder if the US wasn’t heavily involved in the decision. After all, the US is the largest member of the IEA, and is making half the release itself.

Latest Brent Oil Price

In London, Brent crude oil futures for July 2011 delivery was trading at $120.60, 06.00 GMT this morning on the ICE Futures Exchange.

OPEC and 2011 Oil Demand

OPEC economists have pointed to the need for 2 million barrels per day more oil in the third quarter of 2011 and 1.5 million barrels per day in the last three months of the 2011.

“This shortage of 2 million barrels, if it materialises, in the third quarter and the fourth quarter, then the price will go up for sure.” said OPEC Secretary General Abdullah al-Badri yesterday.

“We don’t want to see a very high price. We don’t want to see a very low price. We would like to see a moderate price. We think high prices will affect world growth.” he added.

Latest WTI Oil Price

US Light crude oil futures for July 2011 delivery was trading at $101.82 a barrel, 05.40 GMT this morning in electronic trading on the NYMEX, after hitting $102 earlier in today’s trading session.

Supply and Demand

Global crude oil demand is expected to outpace actual supplies later this year by the widest margin since 2007 and unrest in North Africa and the Middle East is not helping the situation.

“You see this general nervousness in the US and Europe. Prices are going to go up, that’s what’s going to happen.” said Houston oil analyst Andrew Lipow.

OPEC and Oil Prices

In a contentious meeting in Vienna on Wednesday, OPEC member countries failed to agree on new oil production targets, which now sets the stage for higher oil prices later this year as global demand for oil is now rising faster than supplies.