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Oil Prices Rising on Economy Rather Than Iran, Goldman Says

Oil prices are rising because of an improving economic outlook rather than geopolitical tension with Iran, according to Goldman Sachs Group Inc. (GS)

The bank sees little evidence of an Iran premium in crude and says increasing confidence that Europe’s debt crisis will be contained in the region is helping to raise prices, David Greely, head of energy research at Goldman in New York, said in a report yesterday. Manufacturing gains in December in China and the U.S., the world’s biggest crude consumers, supported demand, he said. Brent oil in London has climbed 3.9 percent in the past month, while West Texas Intermediate is up 2.3 percent.

The U.S. added 200,000 jobs last month, while American and Chinese manufacturing expanded more than economists forecast, according to government reports last week. European Union talks on an Iranian crude embargo are bogged down as Greece, Italy and Spain resist a U.K. push for a total ban, according to four diplomats. Iran has threatened to respond to sanctions by blocking the Strait of Hormuz, the waterway that carries 20 percent of global oil consumption.

“The market remains focused on the improving economic outlook rather than on the risk that the Iranian tension escalates into a severe supply shortage,” Greely wrote. “There are encouraging signs that the United States and China are proving resilient to the troubles in Europe, with economic data continuing to surprise to the upside.”

Options Volatility

Further proof of a lack of concern that Iranian supply will be curbed is seen in the options markets, Goldman said. The bank says volatility for calls is outweighed by that for puts, resulting in a negative call skew. This implies that demand for puts, or bets that prices may fall, is higher than for calls, or wagers on rising oil.

“Closing the Strait is not in anyone’s interest, including Iran’s,” Greely said. Shutting Hormuz “would likely be met by a strong military response from the West to reopen the waterway and a release of strategic reserves to supply the market,” he wrote.

To contact the reporter on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net

To contact the editor responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net

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