Iranian situation will affect the trend of oil prices this year

The U.S. economy may have a looming recovery this year, which will bring much-needed improvements to jobs, the troubled housing market, and long-term depressed consumer confidence. Or, there may be financial shocks that lead to another recession. In recent months, investors are deeply worried about the possible spread of the European financial crisis to the United States. But now there is a new worry: Iran. Iran is threatening to disrupt the world oil market and even provoke a new war in the Middle East.

Given its hostility towards Israel, its support for terrorist activities, and its leadership, Iran has been a thorn in the United States since the 1970s. But as Western leaders try to adopt new strategies to preemptively prevent Iran from gaining access to ***, new conflicts are brewing.

The laws recently signed by President Obama actually prevent Iran, the world’s third-largest oil exporter, from selling oil to many of its regular customers. Europe is preparing to establish its embargo on Iranian oil. These new regulations have some flexibility in the strict degree of implementation, but once fully implemented, they will hit the Iranian economy because oil exports bring about 75 billion U.S. dollars per year to the Iranian economy - close to 20% of its total GDP. They may also push up the price of oil, and the price of gasoline at US gas stations may reach US$ 4 per gallon, or even close to US$ 5.

In the face of the West, Iran has threatened to smack the Strait of Hormuz in a habitual tough tone. Twenty percent of the world’s oil transportation must take its way to this sea throat.

The recent oil price hovering around $100 a barrel may already contain a $10 to $20 "fear premium" that reflects rising oil shocks. If ** rings, oil prices may soar to at least 150 US dollars per barrel over a period of time. On the other hand, the fear of engaging with Iran may be over-exaggerated, because Iran itself may be the biggest victim.

The following are four hypothetical situations in which this confrontation will end in the coming months and the probabilities that each situation may become a reality:

Imagine: Iran launched a hot war. The Iranian navy has the ability to mine mines in the Strait of Hormuz and harass tankers and even submarines with tankers and enemy warships.

Realization probability: unlikely. The United States has clearly expressed its determination to maintain the oil transportation in the Persian Gulf. Iran knows that if it performs an armed confrontation with the world’s only superpower, it will lose badly.

Economic Impact: Temporary panic. Economists believe that the peak oil price is about 150 US dollars per barrel in the case of engagement. But it is in the interest of the Obama administration to quickly and decisively end the oil confrontation as far as possible, and the fact is likely to be the same. After that, the price of oil may fall back to $100 a barrel or even lower.

Hypothesis 2: Preemptive attack on Iranian nuclear facilities. These attacks can be carried out by the Israeli-led or U.S.-led coalition.

Realization probability: possible. The United States and Europe now seem to be stepping up sanctions, but this does not guarantee that Israel, as a hypothetical target of Iran, will show military restraint.

Economic impact: smaller than it looks. The military strike against Iran is a bold venture, but after a brief panic, the oil market will soon return to normal. Since then, the price of oil may have fallen to a lower price than it is now, because if the attack undermines its nuclear program, sanctions will no longer be needed. Iran may vent its anger, but it will silently accept its ability to continue selling oil freely.

Hypothesis 3: Lasting sanctions. Iran produces 4 million barrels of oil per day, about half of which are exported to the global market. So if the sanctions completely cut off its oil exports, the world’s daily oil supply will be reduced by about 2 million barrels, or about 2.3%.

Realization probability: very likely. However, the sanctions are highly unlikely to reach the level of impenetrability, so Iran may continue to export some oil. In spite of this, the reduction in oil revenues caused by the sanctions is enough to cause economic chaos and make its leadership position unstable.

Economic Impact: The price of oil and gas rose for a while. The White House said that it can impose sanctions on Iran without allowing oil prices to rise. For example, Saudi Arabia can produce more oil to supplement part of its supply. However, fears of military conflicts, coupled with speculative boosts, will still cause the price of oil to rise. This situation may have already occurred. However, Obama has a trump card: US strategic oil reserves of about 700 million barrels of crude oil.

Hypothesis 4: Iran abandons its nuclear program. There may also be changes in the regime. However, this will probably require a bloody battle**.

Realization probability: possible. There are no signs of Iran’s immediate demise, but most experts also failed to foresee the “Arab Spring” that led to the resignation of multinational leaders in 2011.

Economic Impact: The price of oil rose first and then fell. New signs of Iran’s buzz will bring shock to the oil market, but if the Iranian nuclear crisis is resolved, the fear premium in oil prices will fall. However, with the world's economic growth, rising demand and rising oil costs, it seems that oil prices may still rise.