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A double whammy for debt burdened European oil importers
Friday the Brent oil price reached a new all-time-high at EUR 92.26/barrel breaking thebold record from July 2008 at EUR 91.49/barrel. In contrast oil prices denominated in USD is still around 16% below the record high from the 2008 peak at USD 147/barrel. Increasing political risk pushes oil prices in USD terms higher at a time when the debt problems in Europe is weakening the EUR versus the USD. No wonder why the Europeans are terrified every time they need to drive to the petrol station to fill up their petrol or diesel tanks.
This situation may become even worse for the Europeans and of all other oil consumers going forward. The political tension between Iran and the EU/the US has continue to rise over the weekend pushing the risk premium and oil prices higher as Iran, according to country’s oil minister, has stoppes selling crude to French and British oil companies. Iran’s recent sabre rattling is seen as retaliation against the EU’s sanctions on the state’s lifeblood, oil.
Iran’s cut in oil export is seen as sybolic since neither France nor Brittain is importing a large share of their oil imports from Iran. There are several reasons why France and the UK has been target. First because the UK and France were the two countries most eager to implement the embargo against Iranian export. Second, Iran’s total export to the two countries is small and thus will not hurt the country’s export import badly.
EU’s new sanctions also include a range of additonal restrictions on Iran including a ban on dealing with the central and insurance companies and tries to prevent investments in the country’s oil and has sector, including refining. Iran is the world’s fifth largest crude exporters, but lack refining capacity and needs to import around 40% of its domestic petrol consumption. Trading in the oil market will become even more difficult going forward the Society fornWorldwide Interbank Financial Telecommunication (SWIFT) vital to the global banking industry Friday moved closer to expel Iranian banks. The implications for Iran will be sever as it essentially will be choking off the country’s entire banking system by denying it the main conduit for exchanging information with banks in most countires. Stricter sanctions are expected to take effect on Iranian oil export before the start date of the embargo at 1 July and already in March oil export is expected to fall by around 300k.
China cut the bank’s reserve ratio or the amount of money banks must holda as reserves, by 50 basis points. This is seens as the People’s Bank of China’s effort to engineer a soft landing for the economy. The cut is viewed by the market as an attempt to maintain liquidity and boost economic growth and thereby increasing the demand for oil. People’s Bank of China follows anselig of other central banks injecting liquity into the Financial system lately such as the Bank og England, the Central Bank of Japan, the FED and the ECB boosting optimism about future economic growth and the risk appetite especially for more risky assets such as oil.
Several factors are driving up oil prices at the moment, and more interestng news may comeback this week as the IAEA will meeting Iran to discuss the recent findings from the inspections of Iran’s nyfødde cites earlier this month.
Read the full report below.
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