U.S-Iran tensions put oil markets on alert

Reuters, 05.30.03, 3:04 PM ET By Andrew Mitchell

NEW YORK (Reuters) - Brewing tensions between the Iran and the United States will keep oil markets on alert in coming months, but a direct threat to Iran's crude supply is so far too remote to push prices up, analysts said on Friday.

This week U.S. Defense Secretary Donald Rumsfeld stepped up charges that Iran was harboring wanted leaders of the Islamic militant network al Qaeda. Iran's Foreign Minister Kamal Kharrazi said on Friday the charges were baseless.

Rumsfeld is pressing for a U.S. policy shift to support "regime change" in Tehran, after U.S.-led forces last month ousted Saddam Hussein from another big Middle East oil producer Iraq, officials have said.

"The slow burning issue on the political agenda at the moment that has oil market implications is the US-Iran relationship," said Paul Horsnell of J.P. Morgan bank.

"We expect it to be a background factor and a source of occasional alarms in the market for quite some time to come," said Horsnell.

A disruption to Iran's 3.7 million barrels per day production -- second only to Saudi Arabia among the OPEC cartel -- would rattle an oil market already operating on low stocks after recent supply problems in Iraq, Venezuela and Nigeria.

The United States has already branded Iran part of an "axis of evil," accused of developing nuclear weapons, aiding militant groups and violating human rights.

"What you will see is knee-jerk reactions from time to time when you have declarations out of the administration which seem to be not too diplomatic," said Roger Diwan of PFC Energy in Washington.

It will take clear signals of possible military action -- currently viewed as highly unlikely -- for there to be any rerun of the pre-Iraq war price spike that pushed crude prices to 12-year highs near $40 a barrel earlier this year.

"I think this has a longer fuse. Iran is not Iraq -- the chances are the U.S. will not invade Iran. The oil market's going to be a little bit more sanguine on this," said Sarah Emerson of Energy Security Analysis in Boston.

"You won't have a premium which will stay there and which is significant. The only real risk here is if you have an attack on a nuclear reactor. That could have quite a lot of impact on the market in terns of psychology," said Diwan.

Iran holds 9 percent of the world's oil reserves, has the world's second largest gas reserves and sits beside the Strait of Hormuz, the main shipping channel carrying Middle East crude exports to international market.

The United States has already used most of the economic measures it could wield against Iran.

Since 1995 Washington has had unilateral sanctions, which bans U.S. firms from importing Iranian oil, and it threatens sanctions against foreign firms investing in Iranian oil although these measures are widely disregarded.

Analysts also expect a muted oil price impact from any deepening tensions with Syria, another Middle East oil producer on Washington's list of "rogue states."

Syria only exports 250,000 bpd, around 10 percent of Iran's exports. although U.S. majors ConocoPhillips (nyse: COP - news - people) and ExxonMobil (nyse: COP - news - people) are both regular buyers.