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What Iran Means for Oil

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It's what happens in the broader Middle East that really matters.

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Crude oil spent the last quarter range-bound at around $70, but energy prices moved sharply higher on Wednesday with the December futures contract rising from $66.60 to $71.05, or nearly 7% -- the largest range crude oil has traded in at least 60 days. The United States Oil Fund (USO), an ETF that tracks light, sweet crude oil, is up 6.7% over the past five days.

Along with last day of month action, market pros argue that the surge can be explained, in part, by geopolitical tensions.

"Energy prices have leaped higher with the world awaiting the showdown between the Super Powers on one side and Iran on the other," wrote longtime market pro Dennis Gartman in his morning missive.

And on Thursday, a senior US official met directly with Iran's top atomic negotiator in Switzerland, according to a report in the AP. The bilateral talks were outside of the main meeting in Geneva, where the US and five other nations are trying to convince Iran to discuss its nuclear program and its refusal to freeze its uranium enrichment efforts.

Here in the West, we're a tad uptight about Iranian President Mahmoud Ahmadinejad having access to a nuclear warhead. Can you blame us? When he isn't busy denying the Holocaust, he's threatening Israel.

Of course, Iran counters that its purposes are purely peaceful. Then again, as The Wall Street Journal pointed out, why does a country sitting on the world's second-largest natural gas and third-largest oil reserves need atomic energy?

Still, the showdown with Iran had us wondering: If conflict did erupt over Iran's nuclear program, what kind of impact would that really have on the energy markets? According to analysts we checked in with, Iran, in and of itself, poses no threat to the energy markets. However, it's the protracted conflict engulfing other oil-rich countries that's cause for concern.

First off, though, why does Gartman think political tensions explained energy's strength on Wednesday? There are those who might blame crude's rise on recent DOE figures. Gartman's response: Nonsense.

"The report was a non-event as the aggregate inventory rose 1.5 million barrels," Gartman wrote. "Deriving a $4/barrel rally from those figures is a leap we were and are not willing to take."

Forget the weak greenback too, says Gartman. "Thus, we are left with the 'political' explanation for energy's strength, and we will accept that explanation as both rational and reasonable."

Analysts argue that Iran isn't a problem that the energy markets can't handle. Specifically, let's play out the worst-case scenario and imagine the complete and total loss of all of Iran's oil exports -- now totaling about two million barrels a day.

Even then, the impact this would have on energy markets would be contained.

"You could lose all of Iran's exports and there is enough spare capacity and storage out there that could make up for it overnight," says Frank Verrastro, director of the energy and national security program at the Center for Strategic and International Studies in Washington.

He adds, "The world market is not the way it was in 2003. We have ample capacity."

Michael Lynch, president of Strategic Energy and Economic Research, a consulting firm in Winchester, Massachusetts, agrees.

"A couple years ago, OPEC members had very little spare capacity so they couldn't replace the loss of Iranian crude," Lynch says. "But, now, there is some five million barrels per day available, so we could easily offset that."

Lynch concludes, "The threat is much more a psychological one than any danger to supply and demand."

However, here's the more serious risk analysts point out: any kind of conflict with Iran, should it happen, is protracted or, more alarmingly, spreads to other big oil producers.

"Iran, in and of itself, isn't a problem," says Verrastro. But what if the Iranians tried to take out Saudi facilities and tankers, for instance?

"Persistent and expanded threat to supplies would be an ongoing concern if you lost production or export capability out of the Gulf," he says.

In any event, equity investors don't seem to be too psychologically swept up in the Iran news and Wednesday's rise in oil. Shares of Exxon Mobil (XOM), Chevron (CVX), and ConocoPhillips (COP) all fell slightly that day.

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