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Iranian troops prepare a truck-mounted Silkworm anti-ship missile in the Hormuz area during exercises in 2010. Analysts say conflict between Iran and Israel could lead to higher oil prices if the Strait of Hormuz is closed to tanker traffic. (REUTERS/REUTERS)
Iranian troops prepare a truck-mounted Silkworm anti-ship missile in the Hormuz area during exercises in 2010. Analysts say conflict between Iran and Israel could lead to higher oil prices if the Strait of Hormuz is closed to tanker traffic. (REUTERS/REUTERS)

Energy

Markets brace for possible attack on Iran Add to ...

Oil consuming nations, hedge funds and big oil refineries are quietly preparing for a Doomsday scenario: An attack on Iran that would halt oil supplies from OPEC’s second-largest producer.

Most political analysts and oil traders say the probability of military action is low, but they caution the risks of such an event have risen as the West and Israel grow increasingly alarmed by signs that Tehran is building nuclear weapons.

That has Chinese refiners drawing up new contingency plans, hedge funds taking out options on $170 (U.S.) crude, and energy experts scrambling to determine how a disruption in Iran’s oil supply -- however remote the possibility -- would impact world markets.

With production of about 3.5 million barrels per day, Iran supplies 2.5 per cent of the world’s oil.

“I think the market has paid too little attention to the possibility of an attack on Iran. It’s still an unlikely event, but more likely than oil traders have been expecting,” says Bob McNally, once a White House energy advisor and now head of consultancy Rapidan Group.

Rising tensions were clear this week as Iranian protesters stormed two British diplomatic missions in Tehran in response to sanctions, smashing windows and burning the British flag.

The attacks prompted condemnation from London, Washington and the United Nations. Iran warned of “instability in global security.”

While traders in Europe prepare for a possible EU boycott of imports from Iran, mounting evidence elsewhere points to long-odds preparation for an even more severe outcome.

In Beijing, the foreign ministry has asked at least one major Iranian crude oil importer to review its contingency planning in case Iranian shipments stop.

In India, refiners are leafing through an unpublished report produced in March to look at fall-back options in the event of a major disruption.

And the International Energy Agency, the club of industrialized nations founded after the Arab oil embargo that co-ordinated the release of emergency oil stocks during Libya’s civil war, last week circulated to member countries an updated four-page factsheet detailing Iran’s oil industry and trade.

The document, not made public but obtained by Reuters, lists the vital statistics of Iran’s oil sector, including destinations by country. Two-thirds of its exports are shipped to China, India, Japan and South Korea; a fifth goes to the European Union.

Hedge funds, particularly those with a global macro-economic bias, have taken note, and are buying deep out-of-the-money call options that could pay off big if prices surge, senior market sources at two major banks said.

Open interest in $130 and $150 December 2012 options for U.S. crude oil on the New York Mercantile Exchange (NYMEX) rose by over 20 per cent last week. Interest in the $170 call more than doubled to over 11,000 lots, or 11 million barrels. Still more traded over-the-counter, sources say.

McNally says that oil prices could surge as high as $175 a barrel if the Strait of Hormuz -- conduit for a fifth of the world’s oil supply, including all of Iran’s exports -- is shut in.

IAEA cites “credible information” This month’s speculation of an attack on Iran is the most intense since 2007, when reports showing that Iran had not halted uranium enrichment work fuelled speculation that President George W. Bush could launch some kind of action during his last year in office. Those fears helped fuel a 36 per cent rise in oil prices in the second half of the year.

The latest anxiety was set off by the International Atomic Energy Agency’s Nov. 8 report citing “credible” information that Iran had worked on designing an atomic bomb. A new round of sanctions followed, including the possibility that Europe could follow the United States in banning imports.

That alone would roil markets, but ultimately would likely just drive discounted crude sales to other consumers like China.

A more alarming -- if more remote -- possibility would be an attack by Israel, which has grown increasingly alarmed by the possibility of a nuclear-armed Iran. Israeli Defense Minister Ehud Barak said on Nov. 19 that it was a matter of months, not years, before it would be too late to stop Tehran.

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