IEEJ: April 2012 All Right Reserved

Iran’s Nuclear Ambitions: A Looming
Crisis For the Oil Market
Presentation to the Institute of Energy Economics, Japan (IEEJ)Tokyo, Japan
March 28, 2012

Robert McNally
President
The Rapidan Group

Bob.McNally@RapidanGroup.com
www.rapidangroup.com
t. +1 301.656.4480

The Rapidan Group – Not to be quoted or distributed without the author’s permission

IEEJ: April 2012 All Right Reserved

Key Themes• The oil market has entered a prolonged periodof fundamental tightness, geopolitical risk, andoil price volatility• OPEC (Saudi) spare capacity is and will likely
remain low• Therefore, market sensitivity to geopolitical
disruptions is very high• Iran’s nuclear crisis may come to a head thisyear and oil market participants are starting toprice in conflict risk – LNG exports are also a
concern• Scenarios: (1) Iran concedes; (2) Iran prevails;and (3) conflict• Iran’s pursuit of a nuclear weapons capability
will lead to oil and LNG market turbulence, one
way or the other

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IEEJ: April 2012 All Right Reserved

Absent Supply Control, Oil Prices are Prone to Booms and Busts

Crude Oil Prices
Nominal, Source: BP

$120

$100

$60

$40

$20

$0

1861
1865
1869
1873
1877
1881
1885
1889
1893
1897
1901
1905
1909
1913
1917
1921
1925
1929
1933
1937
1941
1945
1949
1953
1957
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005

US Dollars Per Barrel$80

1861‐1944 US Average.
1945‐1983 Arabian Light posted at Ras Tanura.
1984‐2008 Brent dated.

The Rapidan Group – Not to be quoted or distributed without the author’s permission

2

IEEJ: April 2012 All Right Reserved“The Cure for High Oil Prices Is High Oil Prices”…?

60

$120

Non‐OPEC Oil Production

Dollars per barrel

2010

2007

2004

2001

$0

1998

0

1995

$20

1992

10

1989

$40

1986

20

1983

$60

1980

30

1977

$80

1974

40

1971

$100

1968

50

1965

Million b/d

Crude Oil Price (nominal)

Source: BP

The Rapidan Group – Not to be quoted or distributed without the author’s permission

3

IEEJ: April 2012 All Right Reserved

Next Major Bullish Driver To Come On The Demand Side
Consensus may be lowballing oil intensity of EM GDP growth• Historical experience of oil demand responding toprice hikes not likely to repeat• Consensus forecasts (DOE/EIA, IEA) assume an
unlikely decline in per capita energy consumption• But if per capita energy use increases, demand will bemuch higher (as much as 30% compared withconsensus forecasts by 2030)

The Rapidan Group – Not to be quoted or distributed without the author’s permission

4

IEEJ: April 2012 All Right Reserved

China Is Scrambling to Build Stocks In a Tight Market
The US was lucky to fill stocks with oil freed up by demand‐switching, recessions and non‐OPEC supply surges

US Crude Inventory Changes 1950‐2009
DOE/EIA, Annual Data
800
700

SPR

600

Commercial

500
400
d
/
b 300
d
n
as
u 200
o
h
T
100
0
‐100
‐200
‐300
0
5
9
1

3
5
9
1

6
5
9
1

9
5
9
1

2
6
9
1

5
6
9
1

8
6
9
1

1
7
9
1

4
7
9
1

7
7
9
1

0
8
9
1

3
8
9
1

6
8
9
1

9
8
9
1

2
9
9
1

5
9
9
1

8
9
9
1

1
0
0
2

4
0
0
2

7
0
0
2

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IEEJ: April 2012 All Right Reserved

Current Status – Oil Market is Tight and Fearful
Non‐OPEC supply growth disappoints….

…Inventories are low outside North America.

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6

IEEJ: April 2012 All Right Reserved

Sufficient Spare Capacity?
Barely, and Not If Disruption Risk Returns

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7

IEEJ: April 2012 All Right Reserved

The Rapidan Group - Geopolitical Event Risk Calendar/Crude Oil – Mar ’12 through May ‘12
Timing is approximate unless noted. Event probability denoted as follows: ^^^ high, ^^moderate, ^low

March
April
May
^^Iran: sanctions‐related tensions to rise in the Gulf – wild card risk of an overt attack on nuclear program and global**** reprisals – Fordo, direct and indirect sanctions impacts and Iranian reaction are key risk drivers. Syria playing indirect role.

Crude bullish (rising prices)^^^Mar 30 Pres. Obama’s
Iran/supply adequacy
decision***^^^End‐April EIA
supply/price adequacy
report^^ Iraqi civil conflict/instability. Possible repeat of large (0.6‐0.7 mb/d) but brief Rumaila bombing disruptions on Oct 7 and Dec 13^^^Mar 5 IAEA report and board meeting on Iran / PM Netanyahu in DC^^ Sudan – Ongoing dispute between North and South risks becoming military conflict. ~350 kb/d of South crude production currently disrupted.

**^Mar 2 Iranianparliamentary elections^^^End‐May EU
review of
sanctions^^^ April 1 Several Iran term
crude contracts expire^^Libya: Restart of production and exports discounted; now infighting, instability, and downward revisions threaten reported production levels

Crude bearish (falling prices)^Nigeria: Worsening unrest in north could trigger reprisals in oil‐producing south; strike risk low but MEND violence may pick up*^ Syria ‐ EU ban on 150 kb/d of Syrian oil exports in full effect, Assad’s descent threatens Tehran^Kazakhstan: Unrest between labor, oil management and state could raise supply worries for Europe and China^^^ May 4 West Bank/Gaza elections^ Egyptian elections have shown Islamist parties consolidating power, with Muslim Brotherhood demanding military cede power*^^ P5+1/Iran talks could resume**^ SPR use likely even absent a major disruption if Brent and/or pump prices continue rising above macro pain threshold levels.

***
****

This month’s key changes: P5+1 talks restart and possible SPR
use new short term bearish drivers.
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8

IEEJ: April 2012 All Right Reserved

Spare Capacity Not Enough For Peacetime, Much Less Additional Disruptions

18
18

17.0
17.0

16
16

Historical
Historical andand Potential
Potential Oil
Oil
Disruptions
Disruptions

14
14

MillionMillionBarrels
BarrelsPer
PerDay
Day

12
12

Gross
Gross Peak
Peak Oil
Oil Supply
Supply Loss
Loss

10
10
8
8
5.6
5.6

6
6
4.3
4.3

4
4
2
2

2.0
2.0

2.0
2.0

4.1
4.1

4.3
4.3

2.1
2.1

2.6
2.6

2.3
2.3
0.8
0.8

1.5
1.5

1.7
1.7

0
0

Sources: IEA, EIA and Rapidan
Sources: IEA, EIA and Rapidan

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9

IEEJ: April 2012 All Right Reserved

Strategic Stocks Are Available
Recently US SPR drawdown rates have come under scrutiny

US Strategic Stocks

IEA Strategic Stocks

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IEEJ: April 2012 All Right Reserved

Scenarios
1.Iran freezes enrichment to enable negotiations to begin and stop the drift toward
conflict – crude oil prices drop by about $5‐10 per barrel as risk premium exits.
2.Conflict – Tensions escalate into overt military conflict ‐ (See next page)
3.Iran achieves a hardened breakout capability or nuclear weapon
No major impact on oil prices in 2012 but worst case for oil price stability
afterward
Stable Cold War “Containment” paradigm unlikely to work with Iran and thePersian Gulf Region•

Cold War was very violent and nearly catastrophic in first decades – in
Iran/Israel’s case this initially violent/uncertain phase would play out in theconfined but energy‐critical Middle East.

•

Containment requires credible deterrence, testing/demonstration ofcapabilities – how will oil and LNG prices respond to Israeli, Iranian, Saudi,
and other nuclear tests?

•

Cold War: bilateral; secure, conservative regimes, risk‐averse; 70 years ofideological hostility. Iran: Poly‐nuclear Middle East; insecure and reckless
regimes; religious/ethnic conflict spanning millennia.

Conclusion: Nuclear, hostile Iran + tight oil market = prolonged and highdisruption risk and turbulent oil and LNG prices.

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11

IEEJ: April 2012 All Right Reserved

Iran‐Related Conflict: Short Term Oil Price Impacts
Other crude price estimates•Bank of America – loss of
Iran’s 2.5 mb/d = $140 WTI
crude.
•IMF – loss of 1.5 mb/d Iraniansupply = initial price of $120‐$130 WTI crude (Brent about$10 higher)

Oil
OilPrice
PriceChanges/IranChanges/IranScenarios
Scenarios‐ ‐Survey
SurveyResults
Results
October/November
October/November2011
2011
$175
$175
$150
$150

Range
Range

ChangeChange inin oiloil price
price

$125
$125

LNG

$100
$100

•33% of global LNG flows
through Strait of Hormuz

$75
$75

Average
Average

$61
$61

$50
$50
$39
$39
$25
$25

$23
$23
$11
$11

$‐$‐
$(25)
$(25)
Initial
InitialSpike
SpikeininFirstFirstFew
Few Short‐Disruption
Short‐Disruption
Hours
HoursandandDays
Days

Prolonged‐Disruption,
Prolonged‐Disruption, Prolonged‐Disruption,
Prolonged‐Disruption,
IEA
IEAstocks
stocksnot
notusedused
IEA
IEAstocks
stocksused
used

After
After3030days
days

The
TheRapidan
RapidanGroupGroup

Source: The Short-Term Impact On The Oil Market Of A Possible Military Conflict With
Iran - November 2011 Update, The Rapidan Group(We are in the process of updating this study)•Damage to Qatar’s Ras Laffan
production complex a risk
•Ras Laffan vulnerable to
Iranian missiles; repairs could
take years•Most immediate impact on
spot cargoes (19% of supply)•Impact worst in winter, whengas demand peaks

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12
Contact: report@tky.ieej.or.jp