Iran is back as a big geopolitical risk for the oil market. In reality it never left. The market just decided to pay, rightly, greater attention to more immediate concerns, such as Libya.
Now, however, attention is turning back to Tehran. The rhetoric in Washington and Tel Aviv is rising, and next week's report from the International Atomic Energy Agency, the nuclear watchdog, could inflame further the war of words.
What would be the impact on oil prices of a surprise attack and – the most probable – the subsequent closure of the Strait of Hormuz, the gateway for oil exports for key OPEC producers Iran, Iraq, Kuwait, Saudi Arabia, Qatar and the United Arab Emirates?
The U.S., France, Germany and the U.K. – as well as Israel – are concerned that Iran's nuclear program is aimed at developing a nuclear weapon capability. Tehran says the program is peaceful and is aimed at producing energy and for medical purposes.
If the IAEA report next week makes clear that Iran is working to develop a nuclear weapon, the chances of an attack against it would increase.
The Rapidan Group, a Washington-based consultancy, has just released a survey that offers a crucial insight into the market psychology in the event of an attack. The consultancy, run by Robert McNally, a White House oil adviser from 2001 to 2003, asked market participants what price response they would anticipate in the event of a surprise, overt Israeli attack in March, 2012, taking into account current supply, demand and stocks fundamentals.
The analysis is part of a broader analysis of the impact of a disruption. Mr. McNally knows about it: he was doing the same job for real at the White House during the Venezuelan oil strike in early 2002 and at the start of the war in Iraq in early 2003.
In the first hours of the attack prices would surge, on average, by $23 (U.S.) a barrel, according to the survey. Some market participants anticipate a spike of nearly $45 a barrel.
The consultancy also asked market participants about their price view a month after the attack, depending on the magnitude of the supply disruption and the response of the International Energy Agency.
If the supply outage is short-lived, the survey points to prices up by $11 a barrel. But a prolonged disruption – three weeks' closure of the strait, with 15.5 million barrels a day lost – with no IEA action, would see prices up, on average, by $61 a barrel. The most extreme view puts prices nearly $175 a barrel higher if the supply disruption is prolonged. But if the IEA uses the strategic stocks, offsetting half of the supply loss, prices would be, on average, $39 a barrel higher.
Mr. McNally says that the survey points to a price reaction somewhat stronger than when he ran a similar survey in December, 2010, "reflecting tighter fundamentals since then."
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