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Oil fever subsides, but many remain cautious
2/13/2006
NEW YORK, Feb 12 (AFP): The fever that gripped oil markets in recent weeks has begun to subside as traders discount the likelihood of a doomsday scenario in Iran, yet many remain cautious due to a variety to geopolitical risks.
Crude oil prices have slumped to their lowest levels of the year after spiking at 69.20 dollars per barrel in New York on January 23, near the all-time highs of 70.85 dollars in August 2005 after Hurricane Katrina.
New York's main contract, light sweet crude for delivery in March, lost 78 cents to close Friday at 61.84 dollars.
The possibility of international sanctions on Tehran and a cutoff of Iranian oil has been plaguing the market amid growing concerns about Iran's nuclear energy programme.
Iran is the fourth-largest oil producer, pumping some 3.9 million barrels a day, according to US Department of Energy data for January. Of that, some 2.7 million barrels per day are exported.
"The worst-case scenario assumes that a military strike against Iran would occur late in the year," said Diane Swonk, economist at Chicago- based Mesirow Financial.
But Swonk and others argue that Iran needs oil revenues as much as the world needs Iranian oil.
"Iran counts on oil revenues to fund 90 per cent of their government spending and, therefore, cannot afford to give up those revenues for any length of time," Swonk said.
For BMO Nesbitt Burns analyst Bart Melek, the downward price trend came "as the market started to feel increasingly comfortable that there are sufficient inventories to compensate for any potential production losses from Iran."
Even if the United Nations imposes sanctions, Melek said he expected that any such move "would no doubt keep oil from Iran flowing in order to get China (who holds a veto and imports 10 per cent of its oil from Iran) to agree."
Yet prices remain at historically high levels, and many market participants are not willing to throw out the "risk premium" due to concerns about Iran and elsewhere.
"Considering the heights from which the market has fallen, recent declines are quite small when viewed proportionally," said Mike Fitzpatrick at Fimat USA.
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