TEXT-Fitch: EU Iran Oil ban to support high oil prices

Jan 24 - Fitch Ratings has said in a newly-published report that the embargo on Iranian oil imports to the European Union agreed by EU foreign ministers on 23 January 2012, and effective from 1 July 2012 will increase geopolitical risk in the Middle East region supporting high oil prices.

Iran's reaction to the EU sanctions, and particularly to new US sanctions signed by the US President at end-December 2011, is difficult to predict. Iran called for an immediate end to oil sales to the EU in response to the announced ban. Blocking the Strait of Hormuz, the world's most important oil chokepoint, was also mentioned by Iran recently. Fitch considers this to be a low-probability scenario, and believes any obstruction to trade routes would have a short duration if it did actually transpire.

"Fitch believes that the EU ban on Iranian oil is largely credit neutral for EU integrated oil and gas companies," said Arkadiusz Wicik, Director in Fitch's European Energy, Utilities and Regulation team. "The cash flow impact of the ban may be negative for refining operations, but should be positive or neutral for upstream operations."

The most likely scenario is that the EU embargo will result in higher oil prices. However, prices may not necessarily increase markedly from current levels as some of the risks related to the EU ban on Iranian oil appear factored in already.

The ban will likely have a moderately negative impact on EU refiners as high oil prices may further erode demand for refined products in Europe. This would worsen the already weak supply-demand balance in European refining. The EU embargo may also change oil price spreads in Europe as Iranian crude imports would likely be replaced with alternative crude, which may be priced at a lower discount to Brent than Iranian crude oil.

EU refiners' security of oil supply is unlikely to be substantially affected by an Iran ban. There are alternative suppliers, such as Saudi Arabia (which has said it is able and willing to increase oil production to meet additional demand), Russia and Iraq. Libyan oil production is also recovering. Iranian oil accounted for just 5.7% of total oil imports to the EU in 2010, and 4.4% in Q111. Furthermore, the sanctions will be implemented gradually by 1 July 2012, which should give companies that use Iranian crude oil time to find alternative suppliers..

Southern European countries - Italy, Spain and Greece - are the largest importers of Iranian crude oil in the EU. A rise in oil prices could be further bad news for these countries, which already face a weak economic outlook in 2012.

The impact of the new US sanctions signed into law late last year against Iran is difficult to predict at this stage. It is not certain whether Asian countries, which are by far the largest importers of Iranian crude, accounting for about 70% of total Iranian oil imports, will substantially reduce supplies from Iran in 2012 and replace them with other OPEC sources as a result of the new US sanctions.

If the Asian reduction is substantial, in combination with the EU ban, it could considerably lower OPEC's spare production capacity. In such a scenario, the global oil market would have less flexibility in the event of large unexpected supply interruptions elsewhere, potentially sending oil prices much higher than current levels.

Link to Fitch Ratings' Report: Impact of Iran Oil Ban on EU Oil Companies

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