Like a couple of best buds, they’ve hit a college basketball game, chowed down on hot dogs, talked sports and genuinely seemed to be enjoying each other’s company.
Such are the images of President Barack Obama and British Prime Minister, David Cameron, this week.
But amid the fun and camaraderie, Cameron’s visit to Washington has come at a serious and crucial time in terms of foreign policy – with three areas dominating their talks…
- Afghanistan: How to get out as quickly as possible, given the recent controversy over the Koran book-burning and continued loss of life for American and British soldiers.
- Syria: How to get in as quickly as possible and get help to the desperate citizens under the oppressive and brutal government regime.
- Iran: Another sharp thorn in the Western world’s side – how to tackle its nuclear buildup.
Now, I’m no political analyst, nor is this a political column. So let’s leave the first two hot potato issues to the experts.
However, the Iran situation pertains more to the markets and investing. Specifically, to oil…
Why July 1 Will Be a Defining Moment for the Oil Market
Keep your eye on July 1.
On that date, the European Union will officially ban all oil imports from Iran.
Iranian oil production is already hovering at a 10-year low of 3.3 million barrels per day, with the International Energy Agency (IEA) warning of a “bumpy ride” ahead for the oil market.
The sanctions are, of course, in response to Iran’s continued defiance over its nuclear enrichment activity and uncertainty over whether they’re using it for their own power generation (as they claim), or something far more sinister.
With that uncertainty contributing to a spike in oil and gasoline prices, both in the United States and elsewhere, Obama and Cameron discussed the option of releasing oil from their emergency reserves to cover the shortfall.
And it would be a big shortfall, too…
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The IEA estimates that the coordinated global sanctions on Iran, including reduced oil purchases from other big importers like Japan and South Korea, could take 800,000 to one million barrels of oil per day off the market.
A hit like that would probably see the IEA swing into action in the same way it did last summer when the Libyan crisis wiped out 1.1 million barrels of oil per day. It must first notify IEA member nations and is then able to set in motion a release of emergency supplies in just 24 hours if it feels that a serious supply disruption is imminent.
The IEA also allows its member countries to unilaterally tap into their own emergency oil reserves if they feel it’s necessary.
But is it?
Buckle Up… it’s Going to Be a “Bumpy Ride”
Quoted in the Financial Times, David Fyfe, head of the IEA’s Oil Markets division, states:
“There is a buffer in the system, but it’s not as big as we’d like given the geopolitical uncertainties in the market.”
Supply concerns have led the IEA to revise its 2012 non-OPEC oil production growth forecast from 900,000 barrels per day to 730,000 barrels per day.
However, OPEC production is the highest since the middle of 2008. Saudi Arabian production is rattling along at a 30-year high and Libyan production is back to pre-civil war levels.
Despite such increases in production, however, oil prices have jumped around 20% since December. And with the IEA stating that existing Western oil supplies have dipped below their five-year average for a seventh straight month, news that Obama and Cameron have discussed tapping into emergency oil reserves briefly sent prices down by over $2 a barrel today before ending the day flat.
If you’re not already used to it, prepare yourself for what the IEA calls a “bumpy ride” over the coming months.