On 21 February, the European Union announced a phased-in embargo on Iranian oil. It will be in effect from 1 July this year.
How did Iran respond? Well it stopped oil exports to Britain and France. But this was no more than a symbolic two-finger salute. Because neither country has bought Iranian oil since last November.
However, Carsten Fritsch an analyst at Commerzbank points out,
‘… Iranian oil exports to both these countries are virtually negligible, however the news is likely to have only a psychological effect, fuelling uncertainty on the oil market’.
In short, it will push up the oil price.
The rising oil price has concerned Didier Houssin, a director for energy markets from the International Energy Agency. He told Dow Jones Newswires,
‘…there are alternative supplies that can make up for any loss of Iranian exports.’
He believes both members and non-members of the Organisation of Petroleum Exporting Countries (OPEC) will make up the loss.
Houssin added that Iran provides about 2.2 million barrels per day (mbpd) of crude oil to the worldwide market. And there’s currently an extra 2.82 mbpd that could come from OPEC members.
Does that mean it’s a case of panic over, move along, nothing to see here?
No.
In fact, things could get worse.
As Dr Alex Cowie wrote recently in Money Morning, Iran has threatened to close the Strait of Hormuz. At its smallest point, the Strait of Hormuz is barely 50 km wide. But it’s vital to oil shipments.
This tiny bit of ocean sees more than one fifth of the world’s crude oil shipped through it. Closing the Strait would cut off oil from Saudi Arabia, Kuwait, Iraq and Qatar.
And Iran knows exactly the effect it would have on crude oil prices. Societe Generale estimates closing the Strait would see oil prices spike to $150-200 per barrel!
If that happens, there’s a pretty good chance America will make some serious military threats.
But Iran’s not worried. Because Iran has China on its side.
Unless China joins the ban on Iranian oil, it won’t have much of an effect on Iran’s exports.
The thing is, since the start of the century China’s spent billions of yuan ensuring a steady stream of black gold from Iran. Why would it hurt its own strategic assets?
China has spent the better part of the last decade securing its oil supply.
In 2004, China’s government-owned Sinopec signed a $2 billion deal to develop the Iranian Yadavaran oil field. It has estimated reserves of 3 billion barrels. And when production starts, it will supply over 300,000 barrels of oil a day. Funnily enough, that’s the amount of oil per day that China imports from Iran.
Less than five years later, the same company signed another $6.5 billion deal with Iran. This time to build oil refineries. Iran only has one refinery to alter the crude oil into petroleum. Adding another 6 refinery’s would see the country’s refining capacity reach 3.2 million barrels per day. Up from the current 1.67 million.
Iran imports about 120,000 barrels of petrol. And China is responsible for refining one third of Iran’s petrol needs. So, if Iran refines its crude, it wouldn’t need to rely on petrol imports.
But China’s outlay in Iran doesn’t end there.
The other big oil firm in China, China National Petroleum Corporation, has been shopping. In four years, the company has signed three separate contracts worth $4 billion to explore, drill and pump out oil. Combined they’ll add another 300,000 barrels of oil a day. Mostly for Chinese use.
And these are just the oil deals. There’s also the multi-billion-dollar deals for Iran’s gas fields.
In fact, over the next 25 years, China could pump over $100 billion into the Iranian economy through exploration, refinery development and oil and gas purchases.
And you can guarantee any country that spends that amount of cash in one spot will protect its assets.
According to CNN, ‘China is allowed to deploy to Iran as many experts and security personal as it deems necessary. To date, over 11,000 Chinese nationals have arrive in Iran, majority of whom consisting of non-uniformed military personnel.’
In other words, China has a military presence in the region, without having a hostile military presence.
Cutting off oil supplies to other nations will benefit China, and in the long term, Iran. With few other buyers in the pipeline willing to risk American ire, China should be able to scoop up excess crude and perhaps even buy another oil field or two.
Whatever sanctions the US places on Iranian oil, you can guarantee that China will be looking after its investment. Don’t expect China to jump onto the embargo anytime soon.
Shae Smith
Editor, Money Weekend
P.S. – Dr Alex Cowie, editor of Diggers & Drillers has been looking into rising oil prices for the past two months. He agrees with Societe Generale that oil could go over $200 per barrel if the Strait of Hormuz is closed. In fact, Alex’s last two research reports have focused on this very subject and the two stocks he believes have the most to gain. Click here to read more.
The Most Important Story This Week…
No matter how dire the world economy, there is always a profit opportunity somewhere. The key is to isolate it amongst the general doom and gloom: Greek default, rising unemployment, the US deficit and a possible China slowdown. However, waiting for a cheery consensus in the stock market is not a viable strategy.
You want to buy stocks when nobody wants them. That means you won’t overpay. And any upside is all yours. So, which stocks will rise in the current environment? Our resource specialist, Dr. Alex Cowie, says gold explorers. These fell in 2011. Investors got nervous that the gold price would fall. But the opposite happened. It’s rising. And as the gold bull market heads higher, gold explorers have the potential to send their share prices through the roof. Alex explains further in 2012 – The Year Gold Exploration Stocks Explode.
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Greg Canavan on Why the Australian Economy is Much Weaker than the RBA Thinks: “It’s time the RBA come down from its ivory tower and realised that too. Although I’m not suggesting lower interest rates will fix anything. It hasn’t anywhere else in the world. The central bank and other ‘official’ institutions should just tell it like it is.”
Kris Sayce on ETFs – Why the Easiest Investment Isn’t Always the Best Investment: “ETFs are a useful way to diversify a portfolio or to gain access to stocks or markets you can’t easily invest in. But you shouldn’t use them as your primary investment vehicle. For that, nothing beats hard work, research and picking individual stocks. In our experience, that’s the only way you’ll consistently beat the market.”
Murray Dawes on It’s a Greek Bailout… or Is It?: “The contagion that will flow from such an event will be very real. If you had euros in Portuguese banks and saw Greeks ejected from the euro and given drachmas, which would devalue massively against the euro, what would you do? If you were smart you would see the writing on the wall and start getting your money the hell out of there.”
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PF and TRB….. if you were a refugee you would be be at a refugee camp holding your hands out the same as anyone else. Please dont think it will never happen to you. Nearly all these people were standing on there own two feet with a lot less help than you two have had, until the West intervened in their lives.
TRB , you are correct i shouldnt waste my time making you look like idiots, its the one thing you can do very well all on your own.
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