Oil markets stable despite sanctions

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."

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