I cut my teeth doing energy-related deals in the Soviet Union and still spend a lot of time consulting in Russia and the Caspian Sea basin. These days, my work takes me all over the globe. But the part of the world where my career began still holds the key for future oil supplies.
Especially the Caspian.
This land-locked body of water borders five countries, each having major oil-and-gas reserves.
One of those countries is Iran - the focus of the latest problem that's cropped up in the global energy sector.
And that "problem" - Iran oil sanctions - is certain to bring about an increase in the price of crude oil.
An Insider's View of the Iranian Oil Sanctions
I was six weeks into the BP PLC (NYSE ADR: BP) oil-spill crisis - a frenetic stretch spent advising oil clients, Wall Street analysts, investment managers, and the occasional government official - when Iran was hammered with additional sanctions by the European Union (EU).
In fact, when the Iran-oil-sanctions story broke, I was on Capitol Hill in Washington, where I was scheduled to spend a couple of days in meetings with congressional committee staffs and elected officials. The regulatory changes under review in the aftermath of the Gulf of Mexico spill were supposed to be the main part of the agenda.
But one thing you learn in this business is that the target shifts.
The BP situation had finally calmed down (the relief-well deadline was still in the future, at that point), only to have another of my "specialty areas" blow up.
Specifically, here's what happened. In recent months, the United States, the European Union and the United Nations (U.N.) have each passed new sanctions, hoping to compel Iran to stop its nuclear-enrichment program.
And this time, they're aimed at Iran's energy sector.
These new-and-tougher sanctions make it more difficult for Iran to access banks, exchange currency from oil sales, and import fuel. Despite having the world's second-largest oil reserves (after Saudi Arabia), Iran has insufficient refining capacity, so it needs to import gasoline, diesel fuel, and heating oil to meet domestic needs.
Four months ago - in a special Oil & Energy Investor newsletter report titled "How to Profit from the New Iranian Sanction" - I explained how the Iran-oil-sanction situation would impact prices.
For those who missed that Iran-oil-sanctions report, here are the two major effects of the new measures:
- Iran needs to import about 125,000 barrels of gasoline a day. And the sanctions will make that much more difficult. Most oil traders in the world are pulling out of deals with Tehran for fear of reprisals from the global powers that created the sanctions. China and Venezuela are still sending gasoline, but both have pressures at home against doing that for very long. China - thanks to the growth in its driving population - has its own rapidly accelerating need for gasoline to deal with. And Venezuela has the lowest domestic prices in the world - about 6 cents a gallon. That makes for a very inefficient refining structure and insatiable demand.
- The second impact is more important and provides the key to understanding the pop in crude oil prices coming and the investment profits that will result. The Iran oil sanctions will prevent Tehran from doing oil sales in dollars or euros. Since virtually all oil contracts worldwide are in dollars - with euros being a distant second - that puts the country in a difficult position. Iranian banks cannot acquire either currency anymore. They will need to move to others in a very inefficient attempt to continue doing business. The Iranian banks already have signaled a move to the yuan (the currency of China, currently Iran's primary oil trading partner) and the dirham (of the United Arab Emirates). The banks are doing that to gain access to Dubai banks, Abu Dhabi oil swaps, and a "back door" into dollars and euros, although at a premium price.
Fallout to Watch For
All of this will significantly cut into Tehran's revenue from oil sales, because the rest of the world still denominates oil exchanges in the U.S. dollar and European euro currencies that Iran can no longer use.
As the Iran-oil-sanction situation unfolds, it is certain to add jitters to the market, reflected in crude-oil contracts denominated in both dollars and euros. It will also increase the "crisis premium" on setting prices in futures contracts.
Because Tehran will not be giving up its nuclear ambitions any time soon, it means the pressure on hard currency pricing for oil will increase.
But it also means I need to be very careful.
I do hundreds of media interviews each year. In the middle of all of this blowing up, the phone rang early on a Saturday morning. It was IRNA - the Iranian state news service. The caller asked to speak with Dr. Moors for his reaction on the Iran oil sanctions and their impact.
Now, I've been in the geopolitical equivalent of a barroom brawl before. So my decision was a simple one: I told them that "Dr. Moors" wasn't in the office...
Actions to Take: "Moors Rule No. 31" states that "changing available supply while demand remains constant always results in investment opportunities." Not long after the sanctions went into effect, I told advisory-service subscribers about several opportunities to go short. Such near-term plays have already been exploited. But rest-assured that long-term opportunities will continue to manifest themselves. Stay tuned.
[Editor's Note: Dr. Kent Moors, a regular contributor to Money Morning, is the editor of "The Oil & Energy Investor," a newsletter for individual investors. In a career that spans 31 years, Dr. Moors has been consulting the energy industry's biggest players, including six of the world's Top 10 oil companies and the leading natural gas producers throughout Russia, the Caspian Basin, the Persian Gulf and North Africa. As the preceding interview so clearly illustrates, Dr. Moors' experiences - as well as the unrivaled industry access, contacts and insights he possesses - are the backbone of the Energy Advantage, an energy-sector advisory service that enables investors to capitalize on his contacts and his global-energy-sector insights. For more information on that service, please click here.]
News and Related Story Links:
- The Energy Advantage:
Official Website - Money Morning Special Report:
The BP Relief Wells ... And the Two Nightmare Scenarios to Fear - Money Morning Special Report:
Special Report: New CEO Dudley Isn't the Long-Term Answer at BP, Expert Says - Reuters:
Analysis: Iranian Oil Sanctions Will Leak - The United Nations (UN):
Official Website - MarketWatch.com:
BP says MC252 well has reached static condition
- Oil and Energy Investor:
How to Profit from the New Iranian Sanction - Money Morning Special Report:
Special Report: New CEO Dudley Isn't the Long-Term Answer at BP, Expert Says
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.