Bloomberg News

Oil Drops as EU Iran Oil Embargo Said Likely Delayed Six Months

January 12, 2012

Jan. 12 (Bloomberg) -- Oil dropped the most in two weeks after a proposed European Union embargo of Iranian oil imports was said likely to be delayed for six months.

Crude fell 1.8 percent on the postponement that will allow countries such as Greece, Italy and Spain to find alternative supplies, according to an EU official with knowledge of the talks. Futures surged above $103 a barrel this month to the highest level since May as Iran threatened to block the Strait of Hormuz if an embargo was imposed.

“The EU-Iran news is sending prices lower,” said Stephen Schork, president of the Schork Group Inc., a consulting company in Villanova, Pennsylvania. “Once the Iran headlines came out, the dam burst. The bulls are now in panic mode.”

Crude for February delivery tumbled $1.77 to settle at $99.10 a barrel on the New York Mercantile Exchange. Prices have risen 7.9 percent in the past year. Bullish traders, or hedge funds and other investors that bet prices will rise as Middle East tension escalates, have pushed up oil prices by 16 percent in the past three months.

Futures declined 2.1 percent in eight minutes on the EU- Iran news, reversing an earlier gain. Oil continued to fall in electronic trading after the Nymex settlement at 2:30 p.m. in New York and touched $98.50 a barrel, the lowest intraday price since Dec. 29.

Brent oil fell 98 cents, or 0.9 percent, to $111.26 a barrel on the London-based ICE Futures Europe exchange. It traded as high as $115.12, the most since Nov. 9, before dropping as low as $110.31.

Proposed Ban

The embargo, which would need to be agreed to by the 27 nation-bloc’s foreign ministers on Jan. 23, is also likely to include an exemption for Italy, so crude can be sold to pay off debts to Rome-based Eni SpA, Italy’s largest oil company, according to the official, who declined to be identified because the talks are private.

A ban on petrochemical products would start sooner, about three months after ministers agree to the measure, the official said.

“The European Union could not take a stand and implement an oil embargo of Iran because a number of the states rely on Iranian crude oil,” said Jason Schenker, president of Prestige Economics LLC, an Austin, Texas-based energy consultant.

Phasing-In

The phasing-in of the embargoes would satisfy the concerns of countries with the largest dependence on Iranian oil, including Italy, Greece and Spain, the official said. Those three countries accounted for 68.5 percent of EU imports from Iran in 2010, according to European Commission data.

France, Germany and the U.K. have been pushing for the embargo to increase pressure on Iran over its nuclear program and it has the support in principle of all 27 member states, the official said.

“We drew a line in the sand and now we are kind of erasing it,” said Rich Ilczyszyn, chief market strategist and founder of Iitrader.com in Chicago. “This has caught everybody off guard.”

Western countries allege that Iran’s nuclear-development plans are aimed at building atomic weapons. Iran says they are for civilian purposes and to generate electricity.

The U.S. wants to reduce Iran’s oil revenue in part by convincing countries Iran is no longer a reliable source of oil, an administration official, who wasn’t authorized to speak on the record, told reporters in Washington today. The official said that India and China are seeking to broaden their sources of oil beyond Iran.

Japanese Cuts

Japanese Finance Minister Jun Azumi said today that the country, the world’s second-biggest importer of Iranian crude, may reduce purchases as part of an effort to limit the Persian Gulf Country’s nuclear development.

“We want to take concrete steps to reduce our share in an orderly way as soon as possible,” Azumi said at a press conference in Tokyo today after discussions with U.S. Treasury Secretary Timothy F. Geithner. “The world cannot tolerate nuclear development.”

Iran conducted naval exercises near the Strait of Hormuz, the waterway through which almost 20 percent of the world’s oil flows, for 10 days ended early this month.

Iran, the second biggest producer in the Organization of Petroleum Exporting Countries after Saudi Arabia, pumped 3.58 million barrels a day in December, according to Bloomberg estimates.

Nigerian Strike

Oil gained as much as 2.1 percent earlier on concern that a strike in Nigeria will curb supplies from Africa’s largest oil- producing country.

Nigeria’s Nupeng oil union said it withdrew its members from fields in support of a nationwide strike to force President Goodluck Jonathan to reinstate fuel subsidies. The strikes, now in their fourth day, follow production glitches that have already cut shipments. Another union, Pengassan, said it would begin shutting down the industry on Jan. 15.

The president and the unions are deadlocked over demands that the government reverse its decision to abolish fuel subsidies, which more than doubled the price of gasoline.

Oil volume in electronic trading on the Nymex was 685,098 contracts as of 4:09 p.m. in New York. Volume totaled 627,037 yesterday, 4.2 percent above the three-month average. Open interest was 1.38 million contracts.

--With assistance from Thomas Penny in London and Nicole Gaouette in Washington. Editors: Margot Habiby, Dan Stets

To contact the reporters on this story: Moming Zhou in New York at mzhou29@bloomberg.net; Mark Shenk in New York at mshenk1@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net


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