MEDIA RELEASE
January 10, 2012

Oil prices rose higher in the first trading week of 2012 driven by heightened concerns over Iran’s threat to close the Strait of Hormuz, the strategic waterway where one-sixth of the world's oil exports pass daily, should economic sanctions limit, or cut off, Iranian Oil exports. While prices had marginal decrease last Friday, averages for the week remain higher than in previous week by about US$3 for Dubai crude, more than US$6 for gasoline and nearly US$5 for diesel.

Also supporting price movements is the imminent move of the European Union (EU) to impose an oil embargo on Iran to pressure the country to halt its alleged nuclear weapons program. European diplomat said there was already a consensus that the ban on crude imports would be applied, but that there was still debate on the timing and duration of the measures. About 15% of Iran's oil exports go to Europe. The EU action comes after President Obama sanctioned Iran's central bank last month in an attempt to restrict Iran's oil exports. As a result of the sanctions on Iran's central bank, CNN reported Thursday of a run on many of the country's banks, and that national currency dropped 40%. Inside the country, prices are rising as the currency falls. A small drop in oil exports can have a big impact on the local economy as oil accounts about half of the Iranian government's revenues.

However, despite the initial 2% rise in oil prices, oil markets ultimately did not react significantly to the Iranian threat, with oil analyst Thorbjoern bak Jensen of Global Risk Management concluding that "they cannot stop the flow for a longer period due to the amount of U.S. hardware in the area". Moreover, the Strait is about 55 – 95 kilometers wide and its narrowest is 54 kilometers, wide enough to be completely blocked. Moreover, the fact that Saudi Arabia can compensate more than 2 million b/d of Iran exports also balance the market.

European debt jitters and unexpected increase in US crude stockpiles also weigh prices down on raising concerns about demand. The US Department of Energy said Thursday that US crude oil reserves jumped 2.2 million barrels in the week ending December 30 that confounded market expectations for a drop of 900,000 barrels, according to analysts polled by Dow Jones Newswires, and indicated weaker energy demand in the world's biggest oil-consuming nation.

“ As 2012 dawns, market watchers said that the main event to heed on the demand side is the developing situation in Europe and whether or not policymakers there will come to some agreement on how to deal with their sovereign debt overhang. On the supply side, geopolitical events could drive direction, with Iran and potential sanctions on the country from the U.S. and Europe at the top of the list” Forbes’ 2012 Outlook noted.

Sources:
Forbes, Reuters, CNN, Yahoo! News