Oil futures edged lower Tuesday, as traders reassessed the impact of the European Union's ban on Iranian crude-oil imports.
The E.U. Monday voted to slap an embargo on crude from Iran, but the sanctions have had a muted impact on the market so far. The embargo doesn't take full effect until July 1, giving E.U. countries time to line up alternate sources of oil and offering Iran the opportunity to keep negotiating over its nuclear program, market observers said.
"You'd think the market would run up because of the embargo, but that's not going to be for months," said Mark Waggoner, president of Excel Futures in Bend, Ore.
Light, sweet crude for March delivery settled down 63 cents, 0.6%, at $98.95 a barrel on the New York Mercantile Exchange. Brent crude on the ICE futures exchange settled down 55 cents, or 0.5%, to $110.03 a barrel.
The E.U. imports about 600,000 barrels of oil a day from Iran, making it the recipient of about a quarter of Iran's crude exports. Much of that oil goes to fiscally stressed countries such as Italy, Greece and Spain.
Crude prices rose 1.3% Monday after the E.U. imposed its embargo. Futures, however, gave back much of those gains Tuesday, as attention shifted to its limitations. The widely expected ban--aimed at curbing Iran's nuclear program--isn't set to take effect until July 1, following a review to ensure the weaker E.U. economies can find, and afford, new sources of oil.
The long lead time also gives Iran an opening to continue negotiations over its nuclear program. The U.S. and its allies are concerned that the program is aimed at developing nuclear weapons, a charge Tehran denies.
"We expect Iran is likely to reopen negotiation over its nuclear work before (July 1), which could mean that the embargo might not be implemented as all," said James Zhang, commodity strategist at Standard Bank in London.
Tensions with Iran have rattled the oil markets for months, escalating sharply since the International Atomic Energy Agency warned in November that Iran was taking steps toward developing a nuclear weapon. Iran has threatened to close the Strait of Hormuz, a key passage for the world's waterborne crude, in response to Western pressure over its nuclear program.
The E.U.'s embargo follows U.S. approval of sanctions last month aimed at Iran's central bank, which processes the country's oil revenue. Those sanctions are due to take effect later this year.
Nymex crude futures are up more than 6% since the beginning of November. Market observers say oil prices would be meaningfully lower if not for tensions with Iran. They point to global economic weakness and fiscal turmoil in Europe, both of which have dented demand for crude.
Underscoring those problems, the International Monetary Fund Tuesday cut its estimate of global economic growth this year to 3.3%, down from an estimate of 4% issued in September. Last year, world economic output grew by 3.8%.
Front-month February reformulated gasoline blendstock, or RBOB, settled up 2.71 cents, or 1%, to $2.8050 a gallon. February heating oil settled up 1.44 cents, or 0.5%, to $3.0242 a gallon.
Copyright (c) 2012 Dow Jones & Company, Inc.
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