Iran looks to hit back at EU by pre-empting supply cut-off

By Chris Tedder, Researc Analyst, Forex.com

The measures by Western nations are in protest of Iran's nuclear program and designed to force its hand. When it comes to the effects that it will have on Iran's oil market, sanctions by the US are less direct that the EU embargo, but will likely be just as effective, as Obama attempts to prevent any foreign dealing with Iran's main outlet for the clearing of oil sales. Therefore, it is not surprising that Tehran is attempting to pre-empt the EU by denying them access to its oil.

However, the bill failed its first test on Sunday, when it didn't manage to gain the support necessary to see it presented to the Guardian Council for final approval. Nevertheless, the bill is still alive and a draft could be finalized as soon as this week, and it will reportedly involve halting oil sales to select European countries. If Tehran wants to hit back at the EU it is likely that it will target struggling southern European nations, which would be hardest hit by any bans.

Despite Iran's dominating stance in the international oil market, it is unclear whether any attempts by it to limit the supply of oil would have the intended impact. Firstly, global oil markets are currently well supplied and being bolstered by increased distribution from Libya, following the fall of Gaddafi's regime. Furthermore, European nations could turn to numerous other oil producers, including Russia, Libya and Saudi Arabia.

Iran might be the biggest loser in this situation. It sent an average of 600,000 barrels a day to the EU during 2011, and Tehran would have to find an alternative destination for this oil, which could involve selling oil at significantly discounted prices. The only real upside for the Islamic Republic is that the two largest individual buyers of Iranian oil, India and China, have stated that they will continue to buy its oil. However, while this might be a moral boost, these nations alone will not be able to fill the gap left by losing 600,000 barrels a day of demand.

Putting this together, we think the implications for the price of oil will be limited. The International Energy Agency has already stated that given that there is no specific threat to supply, it is not considering taking any action to bolster supply. On the other side of the equation, European nations will be able to satisfy their demand for oil by using other sources. Consequently, if both the supply and demand of oil manages to remain relatively unaffected, then the price of oil has no real fundamental reasons to move as a result of a ban by Iran aimed at the EU.