Iran Tensions May Prompt Saudi Oil to Cool Price, Goldman Says

Current tensions between the West and Iran may prompt Saudi Arabia to increase crude production, potentially putting pressure on oil prices, according to Goldman Sachs Group Inc.

Saudi Arabia, the world’s biggest crude (OPCRSAUD) exporter, would export its crude to Europe, Jeffrey Currie, the bank’s head of commodities research, said at a conference in London. Iran would sell its crude to Asia, Currie said.

“Europe cannot take the risk of dealing with a supply shock out of Iran. It’s too fragile. So they get on a phone call with the Saudis, and start to secure cargoes,” Currie said. “So you’re left with extra Saudi oil and extra Iranian oil going to China.”

Crude oil gained in the last three weeks, partly on concern that Iran may close the Strait of Hormuz at the mouth of the Persian Gulf. The U.S. tightened economic sanctions against Iran over its nuclear program on Dec. 31, and the European Union is weighing a ban this month on purchases of Iranian crude.

The probability of the strait being closed is low, Currie said. If the route were to shut, that would push up prices, according to Goldman Sachs. “Given the current environment, tight fundamentals, the geopolitical situation in Iran creates massive upside price risk relative to our target,” he said.

The waterway carries about 17 million barrels of oil a day, according to the U.S. Energy Department. That’s about 19 percent of global consumption.

Crude oil traded at about $101.19 a barrel on the New York Mercantile Exchange today as of 9:35 a.m. local time today. It gained 8.2 percent since Dec. 16.

To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.