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Iran to make concessions for sanctions to be eased

Oil&Gas Materials 14 January 2012 14:35 (UTC +04:00)

Azerbaijan, Baku, Jan. 14 /Trend A.Badalova/

The Iranian regime is very unlikely to seek a military conflict and will make sufficient concessions for sanctions to be eased, leading analysts of the British economic research and consulting company Capital Economics believe.

"This would add to the downward pressure on oil prices from weakening global demand and a worsening of the crisis in the euro-zone, consistent in turn with our forecast that Brent will end the year back at $85 per barrel," analysts said.

The EU officials reached a tentative agreement last week to begin barring Iranian oil purchases. Details of that agreement must be developed ahead of the Jan. 23 foreign ministers' meeting, which will formally consider the proposal. During the meeting in Brussels the details of how the ban would be imposed will be discussed.

Capital analysts' believe that the possible gradual tightening of economic sanctions on Iran, which is one of the scenarios, will have neutral impact on oil world oil prices.

In principle, sanctions against Iran could result in the withdrawal of a significant amount of supply from global markets, Capital Economics' analysts believe.

Iran exported roughly 2.2 million barrels of crude per day (bpd) in 2010, equivalent to around 2.5 percent of global demand. In the first half of 2011, Iran supplied 450,000 bpd to the EU, or around 18 percent of Iran's total oil exports. This was second only to the 22 percent share going to China. Japan (14 percent) and South Korea (10 percent), both close allies of the US, were also major buyers, analysts said.

However, the impact on global prices is likely to be diluted by three main factors, they said.

The first one is that sanctions will only be implemented gradually and with plenty of wriggle room. According to the analysts, EU governments are well aware that the burden would fall particularly hard on three of their weaker economies, Italy, Spain and Greece, where imports from Iran account for 13-14 percent of total crude imports.

"There is likely to be a grace period of at least six months before all EU member states are obliged to comply, and even then it is possible that some existing longer-term contracts could still be completed," analysts said.

The second factor is that a gradual tightening of sanctions would allow more time for the market to adapt. Saudi Arabia could eventually produce an additional 2,000,000 bpd and Kuwait an additional 500,000 bpd. Libyan production could probably still recover by as much as 500,000 bpd too.

A third factor is that European countries, and particularly the southern economies who currently trade most with Iran, are likely to require less oil anyway as the region slides back into recession. Sanctions could simply shift more of the burden of falling European imports onto Iran from other suppliers, analysts said.

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