Fears of a 2008 Repeat for Oil

WSJ.com -- A shrinking cushion of available oil, which is already thinner than during last year's Libya crisis, is driving fear that the West's tensions with Iran could send prices as high as in 2008, when crude neared $150 a barrel.

Last year, crude prices rose when Libya's civil war interrupted 1.3 million barrels a day of the country's oil exports, a situation that prompted the U.S. to tap its Strategic Petroleum Reserve to keep prices down.

This year, a standoff between the West and Iran over Tehran's nuclear program is raising even more concern in markets. Iranian officials have threatened to shut down the Strait of Hormuz, the route used to ship most Gulf oil and a fifth of global supplies. Markets are buzzing with talk that the U.S. and U.K. might dip into their reserves, something President Barack Obama and British Prime Minister David Cameron discussed last week without making any decisions.

One major reason that anxiety about Iran is more intense than the concerns about Libya a year ago is that so-called spare production capacity—the amount of idle output that can be swiftly brought online if needed—is already more stretched than it was in 2011.

Spare capacity stood at 2.5 million barrels a day on average in January and February this year, compared with 3.7 million barrels a day in the same period last year. The numbers come from the Energy Information Administration, an agency that predicts oil-market trends for the U.S. government.

This year, global oil demand is up by about one million barrels a day to around 89 million barrels. But technical and political problems have already shut down 750,000 barrels a day from Canada to South Sudan, before factoring in any disruption from the Iranian situation. A rumor of a Saudi oil-pipeline explosion, which proved not true, recently helped push crude prices in London above $128 a barrel—a level not seen in nearly four years.

On Friday, light, sweet crude for April delivery rose $1.95, or 1.9%, to settle at $107.06 a barrel on the New York Mercantile Exchange. May Brent crude on the ICE Futures Europe exchange settled up $3.21, or 2.6%, at $125.81 a barrel.

The potential for a further surge in prices amid tight markets is a rare point of agreement between the U.S. and Iran.

"This is something everybody is watching for," said U.S. deputy energy secretary Daniel Poneman on the sidelines of an energy conference in Kuwait. "Nobody wants to see a reprise of what happened in 2008," he said, referring to an all-time high of $147 a barrel for Nymex crude that contributed to a global recession. That upswing, too, came amid an intensification of tensions with Iran at a time when the cushion of spare capacity was shrinking.

Speaking at the same Kuwait conference, Muhammad Ali Khatibi, a top Iranian oil official, echoed his American counterpart, warning in an interview that prices may not have seen the worst of it. "For now, nothing has happened. But what if something happens?" Mr. Khatibi asked. "It will be like 2008."

The situation is fueling concerns that rising oil prices will undercut the long-gestating global economic recovery. "Oil prices at current levels are so high it is not consistent with sustained economic recovery," Mr. Poneman said.

Numbers point to an even more testing time in the second half of the year. Demand for crude will increase as U.S. and European refineries return to operation after seasonal maintenance, right when sanctions against Iran bite the hardest as the full European Union embargo goes into effect. Also, a U.S. ban on oil trades with Iran's central bank will begin at the end of June.

After they kick in this summer, the EU embargo and U.S. sanctions may take one million barrels a day of Iran crude off the markets, according to the International Energy Agency, which represents some of the world's largest oil consumers.

Partly as a result, demand will exceed production by roughly that same amount—1.1 million barrels a day—in the third quarter, according to the Energy Information Administration. Use of existing inventories would likely make up the difference. Iran exports about 2.2 million barrels of crude a day.

Sanctions against Iran are "happening at a time when the market is tight," said Christophe de Margerie, chief executive of French oil giant Total SA TOT +0.99% in an interview. "Demand is strong" while supply problems are "piling up," he said.

"The uncertainty is how the Iranian supplies may develop," said IEA Executive Director Maria van der Hoeven.

Ms. van der Hoeven said that, for now, there is enough oil to meet demand.

But asked if she was worried about the oil market this year, she said Middle East tensions could still go out control. The powder keg is "in this part of world," she said.

Write to Benoit Faucon at [email protected]