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Iran sanctions threat gives oil price support

Proposals from the EU and US to impose new sanctions targeting Iran’s oil exports are sustaining oil prices, despite growing worries about demand and the health of the world economy

THE SANCTIONS, which could include measures to ban transactions with Iran’s central bank and may be pushed through by the end of January, could shut in 2.5 million b/d of exports. Opec has warned Western governments that the group would struggle to replace the supply.

The Iran issue has given support for crude prices despite other bearish signals. In London on 13 December, front-month Brent was trading just shy of $108/b. WTI firmed above $98/b. World oil production soared in November by almost 1 million b/d, to 87.76 million b/d. WTI is in contango, while backwardation in other crude markets is weakening, suggesting uncertainty about near-term oil demand. The IEA said it revised down its forecast for demand next year by 200,000 b/d.

Opec, on 14 December,  formalised a production target of 30 million b/d, which would be in line with forecast demand for its crude in 2012. The target would ignore calls from some price hawks to restrain output in expectation of a dip in demand later in 2012. "We can’t do less than that, because prices would go up and we can’t afford to let that happen," one Opec delegate told a newswire ahead of the meeting.

But a formalisation of Opec’s present output quota risks a price drop if demand data, which lag supply decisions by several months, show that consumption has already begun falling, as many analysts believe. Eurozone woes and concerns about an economic slowdown in China have also bolstered market bears. A rise in the value of the dollar against the euro will weaken oil prices. The oil market’s strength in 2011 may have already laid the seeds for its weakness in 2012.

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