Iran Election Reaction May Trickle Into Oil Over Long Term

Dow Jones Newswires

NEW YORK (Dow Jones Newswires), Jun. 15, 2009

Oil prices fell steeply in spite of the post-election turmoil in Iran, the world's fourth-largest crude producer, as the market impact of Mahmoud Ahmadinejad's consolidation of power could take years to play out.

Thousands of protesters massed in Tehran's streets Monday in response to last week's presidential election, in which Ahmadinejad claimed a disputed victory over challengers including former Prime Minister Mir Hossein Mousavi. Iran's Supreme Leader Ayatollah Ali Khamenei has told the top election supervisory body to examine Mousavi's complaints, state television said Monday.

With 4 million barrels a day in crude oil production capacity, Iran is the world's fourth-largest oil producer after Russia, Saudi Arabia and the U.S. But output has been declining amid meager investment in the sector, which is controlled by the state.

Ahmadinejad's consolidation of power could lead to "much lower foreign investment" in Iran's oil infrastructure, said Greg Priddy, an oil analyst at Eurasia Group, a consultancy. The public demonstrations over the election could become a factor in oil markets, but only if they drag on and the violence escalates substantially. "Just having large street protests is not going to disrupt the flow of crude," Priddy said.

Investment in Iran has already been crimped by international sanctions aimed at its nascent nuclear program. Ahmadinejad, who has made a point of antagonizing the West, could keep foreign inflows to a minimum.

The International Energy Agency's most recent long-term energy outlook said Iran's ability to expand its production by 2015 remains in question "given limitations on investment and geopolitical factors."

Most large international energy companies have shied away from doing deals in Iran due to international sanctions, but there are some oil exploration and production projects in the pipeline undertaken jointly with investors from countries such as Belarus and China. Experts believe that Iran itself isn't investing enough in its oil sector to fully exploit its reserves.

Continued meager investment in Iranian oil production means it will have difficulty boosting, or even maintaining, output even as global demand is expected to grow in the years ahead. That could further stress spare capacity among producers, forcing prices to shoot high enough to bring demand in line with constrained supply.

Ahmadinejad's re-election could also invigorate bills in the U.S. Congress that would put new sanctions on companies involved in exporting refined oil products to Iran or constructing new refineries inside Iran, said Helima Croft, senior geopolitical strategist at Barclays Capital. She said a House bill named six companies that have supplied the bulk of Iran's gasoline imports in the past year: BP PLC, Total S.A., Reliance Industries Ltd., Glencore International AG, Vitol Holding BV and Trafigura Group. Despite its status as a crude production heavyweight, Iran's limited refinery capacity forces it to import large quantities of gasoline, while price controls keep domestic demand high.

Iran lies on the Strait of Hormuz, a critical waterway through which 20% of the world's oil is shipped. Saber-rattling over Iran's nuclear program has led to fears the Islamic republic could try to disrupt the flow of tankers through the 21-mile-wide strait.

But with U.S. President Barack Obama pledging new dialogue with Iran, some analysts believe a showdown between either the U.S. or Israel and Iran over its nuclear ambitions looks less likely.

White House spokesman Robert Gibbs said Monday that the administration has concerns about the election outcome, adding that "the concern we have about their support for terror isn't any different than it was on Friday."

Even if tensions with Iran escalated to the point that oil supplies are cut off, the world is in a better position to handle a disruption than it was just a year ago. Global demand is down by more than 3 million barrels a day in the current quarter, while spare capacity tops 6 million barrels a day, according to the IEA.

Benchmark U.S. crude futures settled $1.42, or 2%, lower at $70.62 a barrel Monday on a stronger dollar and declining U.S. stock markets.  

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