Oil Drops as EU Embargo of Iran Said Likely to Be Delayed by Six Months

Oil dropped the most in two weeks after a proposed European Union embargo of Iranian oil imports was said likely to be delayed for six months.

Crude fell 1.8 percent on the postponement that will allow countries such as Greece, Italy and Spain to find alternative supplies, according to an EU official with knowledge of the talks. Futures surged above $103 a barrel this month to the highest level since May as Iran threatened to block the Strait of Hormuz if an embargo was imposed.

“The EU-Iran news is sending prices lower,” said Stephen Schork, president of the Schork Group Inc., a consulting company in Villanova, Pennsylvania. “Once the Iran headlines came out, the dam burst. The bulls are now in panic mode.”

Crude for February delivery tumbled $1.77 to settle at $99.10 a barrel on the New York Mercantile Exchange. Prices have risen 7.9 percent in the past year. Bullish traders, or hedge funds and other investors that bet prices will rise as Middle East tension escalates, have pushed up oil prices by 16 percent in the past three months.

Futures declined 2.1 percent in eight minutes on the EU- Iran news, reversing an earlier gain. Oil continued to fall in electronic trading after the Nymex settlement at 2:30 p.m. in New York and touched $98.50 a barrel, the lowest intraday price since Dec. 29.

Brent oil fell 98 cents, or 0.9 percent, to $111.26 a barrel on the London-based ICE Futures Europe exchange. It traded as high as $115.12, the most since Nov. 9, before dropping as low as $110.31.

Proposed Ban

The embargo, which would need to be agreed upon by the 27 nation-bloc’s foreign ministers on Jan. 23, is also likely to include an exemption for Italy so crude can be sold to pay off debts to Rome-based Eni SpA (ENI), Italy’s largest oil company, according to the official, who declined to be identified because the talks are private.

A ban on petrochemical products would start sooner, about three months after ministers agree to the measure, the official said.

“Geopolitics reign supreme,” said Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington. “We had a pretty big intraday move, almost $5 from the top to the bottom today.”

Options giving the right to sell June futures for $10 a barrel less than their current price cost 9 percent more than those granting the right to buy at $10 above today’s settlement.

Phasing-In

The phasing-in of the embargoes would satisfy the concerns of countries with the largest dependence on Iranian oil, including Italy, Greece and Spain, the official said. Those three countries accounted for 68.5 percent of EU imports from Iran in 2010, according to European Commission data.

“The European Union could not take a stand and implement an oil embargo of Iran because a number of the states rely on Iranian crude oil,” said Jason Schenker, president of Prestige Economics LLC, an Austin, Texas-based energy consultant.

France, Germany and the U.K. have been pushing for the embargo to increase pressure on Iran over its nuclear program and it has the support in principle of all 27 member states, the official said.

Western countries allege that Iran’s nuclear-development plans are aimed at building atomic weapons. Iran says they are for civilian purposes and to generate electricity.

“We drew a line in the sand and now we are kind of erasing it,” said Rich Ilczyszyn, chief market strategist and founder of Iitrader.com in Chicago. “This has caught everybody off guard.”

U.S. Strategy

The U.S. wants to reduce Iran’s oil revenue in part by convincing countries Iran is no longer a reliable source of oil, an administration official, who wasn’t authorized to speak on the record, told reporters in Washington today. The official said that India and China are seeking to broaden their sources of oil beyond Iran.

Japanese Finance Minister Jun Azumi said today that the country, the world’s second-biggest importer of Iranian crude, may reduce purchases as part of an effort to limit Iran’s nuclear development.

“We want to take concrete steps to reduce our share in an orderly way as soon as possible,” Azumi said at a press conference in Tokyo today after discussions with U.S. Treasury Secretary Timothy F. Geithner. “The world cannot tolerate nuclear development.”

The Persian Gulf country conducted naval exercises near the Strait of Hormuz, the waterway through which almost 20 percent of the world’s oil flows, for 10 days ended early this month.

Iran, the second biggest producer in the Organization of Petroleum Exporting Countries after Saudi Arabia, pumped 3.58 million barrels a day in December, according to Bloomberg estimates.

Nigerian Strike

Oil gained as much as 2.1 percent earlier on concern that a strike in Nigeria will curb supplies from Africa’s largest oil- producing country.

Labor unions said today they will continue the action that threatens oil exports after no agreement was reached at a meeting today with President Goodluck Jonathan on restoring fuel subsidies. The unions plan to resume talks with the president on Jan. 14, Abdulwaheed Omar, president of the Nigeria Labour Congress, said in an e-mailed statement.

Oil volume in electronic trading on the Nymex was 691,231 contracts as of 5:15 p.m. in New York. Volume totaled 627,037 yesterday, 4.2 percent above the three-month average. Open interest was 1.38 million contracts.

To contact the reporters on this story: Moming Zhou in New York at mzhou29@bloomberg.net; Mark Shenk in New York at mshenk1@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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