Syed Rashid Husain When in February this year, EU's decision to implement Iran oil sanctions from July 1 were announced, crude markets got rattled. WTI prices peaked well above $100. Additional fears that the Iran might do something dramatic in the Strait of Hormuz to cut off supplies to global markets, helped propel the price of a barrel of Brent crude then to over $128. Months have passed. We are now in July. The sanctions are finally in place. Yet the markets are stable and in senses. Over the last few months, market sentiments have undergone drastic transformation. A glut like situation is very much on cards. This is a different crude world than just a few months back, with WTI now well in 80s - considerably below the level prevalent then in February. And pundits continue to remain confident that despite the EU sanctions, bears would continue to rule the global crude markets - for some time to come. "I do not see anything that will lift prices significantly above $100 for the next three months," said Kirk McDonald, senior research analyst at St. Louis-based Argent Capital Management. "We will definitely get some price spikes based on saber-rattling out of Iran and possible monetary easing from central banks, but it is difficult to forecast a rising trend when the economy is slowing," he said. And the anticipated stimulus was already in place by Thursday. The European Central Bank cut its key lending rate to a record low and the Bank of England voted to boost its asset purchases. This helped firm up the crude markets somewhat, buoying Brent prices but interestingly not the West Texas Intermediate (WTI) crude. The August WTI futures contract closed Thursday at $87.22 a barrel on the New York Mercantile Exchange, down 44 cents, while Brent crude for the same month closed at $100.70, up 93 cents, on ICE Futures in London. Year to date, futures prices have thus lost about 12 percent. More recently though Iran's test-firing of missiles during military drills did help "goose-up" oil prices. "Iran rockets already have done their work," says Byron King, editor of investment newsletter Outstanding Investments. "Prices are rising off the bottom." The ramping Saudi production, a weaker global economy and Europe's debt crisis have combined to significantly soften the blow of any global supply cuts or disruptions related to Iran. And in the meantime, the supply side has also been weighing on prices. For some months now, Saudi Arabia has been pumping oil at its fastest rate in 30 years. Plenty of Libyan oil is also back on the market. Oil from America's shale fields has also helped in plugging the gap caused by disruptions in supplies from Syria, Yemen and South Sudan and the Iran sanctions. The Iran nuclear issue has been "dwarfed by the supply response by Saudi Arabia, and by the euro-debt crisis," Matt Smith, an analyst with Summit Energy says. "Iranian concerns added a risk premium earlier in the year, but this has been unwound by both the Saudis boosting production and more headline-grabbing economic fears elsewhere." The market is a long way from $100 on WTI crude because of a "three-pronged bearish attack on prices, emanating from deteriorating demand from the euro-debt crisis, a slowing US economy and signs of slowing in China," Smith added. US onshore domestic production has ramped up too, while Saudi Arabia has increased production to 10 million barrels per day "and indicated it will do so further if needed," he emphasized. "If there was a more robust global economy, we may have seen more of a lingering price impact. All in all, that "leaves the Strait of Hormuz as Iran's biggest asset to saber-rattle about, but the "incremental supply loss is not concerning the market, at least not at the moment," Smith underlined. The most obvious factors that could lift prices back above $100 include a conflict in the Gulf, such as an Israeli attack on Iran's nuclear facilities, or a major supply interruption from Venezuela, Iraq or Libya, according to James Williams, an energy economist at WTRG Economics. "The probabilities of those are not high in the next three months but certainly possible," he said. Near term, he sees $80 or lower for WTI, with a 40-50 percent chance of $60 before year-end under a US recession scenario. "In the last 40 years, recessions have always led to a price collapse," he added. Underlining the gloomy global economic scenario, the IMF warned last week, it would trim growth forecasts, as interest-rate cuts in Europe and China failed to assure investors the moves will be enough to support demand. The slashing of interest rates by the European Central Bank (ECB) Thursday coupled with a far more surprising rate cut by the People's Bank of China raised fresh questions about the state of the world economy, analysts said. The IMF hence is to lower its estimate for global growth this year on weakness in Europe, the US, Brazil, India and China, Managing Director Christine Lagarde said. World powers, to the detriment of Tehran, have succeeded in keeping crude markets under tab. For the sanctions regime to succeed and continue this was an absolute must and the regimen seems to have crossed this hurdle. This is no mean an achievement for anti-Iran campaigners. And consequently the crude markets are not only stable for the time being - they appear to remain so in the near future too.
