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How would oil prices be affected if a conflict with Iran were to break out ?

The price of a barrel of Brent could spike from current levels of around $114 to anywhere between $135 and $210 in the unlikely event of a military strike on Iran’s nuclear facilities by the US or Israel. However, this threat is itself a very powerful reason for the West to hold off. Instead, by far the more eminent risk is that near term oil prices will collapse due to an escalation of the financial crisis in the euro-zone.

Oil prices are still some way below the peaks seen during the Arab Spring. (See Chart 1 below) But they have recently been propped up by three factors:

  • renewed optimism that the crisis in the euro-zone can be contained;
  • reduced fears about the US and Chinese economies, due in part to fresh hopes of monetary easing;
  • and persistent speculation that Israel or the US is about to launch a military strike on Iran.

It is hard to quantify the relative importance of these, and other, pressures on the oil price. However, based on the price movements observed after recent news on Iran, worries about a potential conflict with the West are probably already adding between $2 and $5 to the cost of a barrel of crude.

Tensions between Iran and the US, as well as both Israel and Saudi Arabia, are unusually high and have been raised further by the latest International Atomic Energy Agency (IAEA) report on the alleged militarisation of Iran’s nuclear programme and the resulting rebuff by Iran’s envoy to the International Atomic Energy Agency (IAEA) Ali Asghar Soltaniyeh. As a global investment house, geopolitical research – provided by the likes of Stratfor is an essential ingredient of our macro-economic research in a world that is ever more connected.

Nonetheless, any military action against Iran does still appear to be a long way off. The US is struggling to disengage from Iraq and Afghanistan, was reluctant to take the lead in Libya, and has plenty to worry about in Syria and Egypt. Officials have stressed that a strike on Iran’s nuclear facilities, whether by the US or Israel, would have limited benefits but many potential costs, not least the impact on oil prices, and is therefore very much a last resort. Instead, the US is focusing on encouraging other countries to tighten economic sanctions on Iran.

However, as investors regularly ask, it is worth considering what might happen to oil prices if we are wrong. Iran produces approx 3.5m barrels per day (bpd), or 4% of global supply, second only to Saudi Arabia within OPEC. (See Chart 2.) It is unlikely that any military strike would target Iran’s oil facilities, but global sanctions or the withdrawal of supplies by Iran itself could have a similar effect. One useful rule of thumb is that the percentage increase in the oil price required to balance the market following a shock should be roughly five times the percentage reduction in supply. Correspondingly, a temporary halt to Iranian supply might add 20% (4%*5) to the price of Brent, taking it above $135 per barrel.

The impact could be much greater if Iran followed through on past threats to disrupt oil supplies through the Strait of Hormuz, the only waterway available to ship oil from the Persian Gulf. This could reduce global supply by 10-15m bpd, at least temporarily, which might lift the price of Brent to between $180 and $210 per barrel. However, the impact would be offset in part by the release of emergency stocks and there are serious doubts that Iran has the military resources to block the Strait for long.

In all this, though, it important to reiterate that we do not think that a military strike on Iran is imminent. Instead, for the next several years the more likely seismic shock is the break-up of the euro, which could see significant temporary oil price collapsing despite the long term fundamentals and unprecedented demand from the developing world. Some of our energy traders predict a $150 trading range within the next 12 months irrespective of the Iran threat, purely based on demand from the developing world and the fact that the 2008 – 2010 credit crisis virtually evaporated refining and exploration investments in the crucial supply regions. Either way, energy markets will continue to dominate global investment themes for the future.

About Global Fund Exchange

The Global Fund Exchange Group is an investment management group offering sensible diversified portfolio solutions to institutional investors since 2005. These are often customized to the particular requirements of clients, optimizing returns and controlling risk. Our focus is on the real and evident global macro trends that will shape our planet in future years.

Global Fund Exchange has constructed tailor made multi-manager portfolios exceeding US$2 billion for some of the world’s most sophisticated pension funds, sovereign wealth funds and other institutions in global tactical asset allocation, alternative investments, energy, commodity and multi-strategies.

The Earth Wind & Fire Fund is an actively managed global macro, multi-strategy, multi-manager fund focused on the future of energy and the future of our planet. The fund aims to provide our institutional investors with the ability to participate in these mega macro opportunities whilst significantly reducing volatility. Through strategic mandates with highly experienced specialists all across the world, we specifically focus on opportunities in:

  • Clean Energy
  • Agriculture
  • Carbon & Emissions Trading
  • Systematic Trading
  • Water
  • Traditional Energy
  • Natural Resources

The AquaTerra Fund is a focused carve out of the existing Agriculture, Water and Natural Resources portfolios originated from the  the multi strategy Earth Wind & Fire Fund. This more concentrated portfolio invests in agriculture, water and other scarce natural resources across equities, commodities and futures throughout the world. It is managed by the same multi-manager team at Global Fund Exchange, headed by Lauralouise Duffy and Anric Blatt.

The Earth Wind & Fire Fund is an actively managed global macro, multi-strategy, multi-manager fund focused on the future of energy and the future of our planet.

The fund aims to provide our institutional investors with the ability to participate in these mega macro opportunities whilst significantly reducing volatility.

Through strategic mandates with highly experienced specialists all across the world, we specifically focus on opportunities in:

Clean Energy Agriculture Carbon & Emissions Trading Systematic Trading
Water Traditional Energy Natural Resources Hedge Strategies
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Automakers line up to support Obama's "historic" fuel efficiency standards

President Barack Obama took a short break from the US debt negotiations to announce new fuel efficiency rules for cars and vans, hailing the new standards as “the single most important step we’ve ever taken as a nation to reduce our dependence on foreign oil”. (watch video announcement)

As widely trailed, Obama confirmed that automakers would be required to deliver an average fuel efficiency for their US fleets of 54.5 miles per gallon by 2025.

The rules also require cars to deliver a five per cent a year improvement in efficiency through to 2021 with vans required to improve by 3.5 per cent a year. After 2021 all vehicles are expected to have to improve by five per cent a year, although the White House signaled that the standards would be reviewed before 2021 to ensure that rules are continuing to prove cost effective.

Obama said the rules would reduce US oil consumption by 2.2 million barrels a day through to 2025, while White House figures have suggested that the new regime would help cut US carbon emissions by more than six billion tones over the next 15 years.

Read complete article

List of top ten fuel efficient cars

 
 

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Another Great Thomas Friedman Column

Thomas Friedman continues his series of excellent columns making a strong case for why we need to solve the climate crisis:

“What a contrast. In a year that’s on track to be our planet’s hottest on record, America turned “climate change” into a four-letter word that many U.S. politicians won’t even dare utter in public. If this were just some parlor game, it wouldn’t matter. But the totally bogus “discrediting” of climate science has had serious implications. For starters, it helped scuttle Senate passage of the energy-climate bill needed to scale U.S.-made clean technologies, leaving America at a distinct disadvantage in the next great global industry. And that brings me to the contrast: While American Republicans were turning climate change into a wedge issue, the Chinese Communists were turning it into a work issue.”

“There is really no debate about climate change in China,” said Peggy Liu, chairwoman of the Joint U.S.-China Collaboration on Clean Energy, a nonprofit group working to accelerate the greening of China. “China’s leaders are mostly engineers and scientists, so they don’t waste time questioning scientific data.” The push for green in China, she added, “is a practical discussion on health and wealth. There is no need to emphasize future consequences when people already see, eat and breathe pollution every day.”

Read the rest of this great column by clicking here

 
 

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US DOE Pledges $200M to Wind & Solar – Not "Waiting Around" for Climate Bill Passage

The U.S. Department of Energy (DOE) under the leadership of Energy Secretary Steven Chu is not waiting around for the Senate as it works to draft new climate legislation.

Secretary Chu announced Friday that the DOE will invest over $200 million over the next five years to increase deployment of solar and wind energy technology throughout the United States.  This funding will “help strengthen American competitiveness in renewable energy and transform the US into a lasting manufacturing presence in the 21st century clean-energy economy,” said Chu.

The DOE funding will support both manufacturing-focused research projects in wind and solar, as well specific funding for research into advanced processes for use in the photovoltaic (PV) industry.

Read the full article here…

 
Comments Off on US DOE Pledges $200M to Wind & Solar – Not "Waiting Around" for Climate Bill Passage

Posted by on April 28, 2010 in Clean Energy, Investments, Solar, Wind

 

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