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$100 oil out of reach despite Iran saber-rattling

SAN FRANCISCO (MarketWatch) -- European Union sanctions on Iran officially went into effect this month, but for oil, the $100-a-barrel level remains out of reach for the U.S. benchmark, and lower prices may soon follow.

"I do not see anything that will lift prices significantly above $100 for the next three months," said Kirk McDonald, senior research analyst at St. Louis-based Argent Capital Management.

"We will definitely get some price spikes based on saber-rattling out of Iran and possible monetary easing from central banks, but it is difficult to forecast a rising trend when the economy is slowing," he said.

On Thursday, the European Central Bank cut its key lending rate to a record low, and the Bank of England voted to boost its asset purchases. The stimulus measures helped buoy prices for Brent crude, but didn't provide support for West Texas Intermediate (WTI) crude prices. Read more on ECB, BOE decisions.

The August WTI futures contract (CLQ2) closed Thursday at $87.22 a barrel on the New York Mercantile Exchange, down 44 cents, while Brent crude (LCOQ2) for the same month closed at $100.70, up 93 cents, on ICE Futures in London. Read about Thursday's oil market action.

WTI prices peaked well above $100 back in February of this year, in large part due to the EU's decision to implement oil sanctions on Iran starting on July 1.

More recently, Iran's test-firing of missiles during military drills has helped "goose-up" oil prices, according to Byron King, editor of investment newsletter Outstanding Investments. Oil prices had traded below $80 as recently as late June.

"Iran rockets already have done their work," he said. "Prices are rising off the bottom."

But year to date, futures prices have still lost about 12%.

The market is a long way from $100 on WTI crude because of a "three-pronged bearish attack on prices from deteriorating demand from the euro-debt crisis, a slowing U.S. economy and signs of slowing in China," said Matt Smith, an analyst with Summit Energy.

There's also a bearish impact on the supply side, with Saudi Arabia raising production, which stood at around 9.5 million barrels per day in 2011, according to U.S. government data.

U.S. onshore domestic production has ramped up too, while Saudi Arabia has increased production to 10 million barrels per day "and indicated it will do so further if needed," Smith said.

Saudis to the rescue

The Saudis, a weaker global economy and Europe's debt crisis have combined to significantly soften the blow of any global supply cuts or disruptions related to Iran.

The Iran nuclear issue has been "dwarfed by the supply response by Saudi Arabia, and by the euro-debt crisis," Smith said. "Iranian concerns added a risk premium earlier in the year, but this has been unwound by both the Saudis boosting production and more headline-grabbing economic fears elsewhere."

Meanwhile, "Iran has faced a fundamentally weakening market as we have moved through the year, with increasing supply and slowing demand growth," he said. "If there was a more robust global economy, we may have seen more of a lingering price impact."

All in all, that "leaves the Strait of Hormuz as their biggest asset to saber-rattle about," he said, but the "incremental supply loss is not concerning the market, at least not at the moment."

Indeed, Iran has been consistently threatening since early this year to block the Strait, which is a key shipping route for oil, in retaliation for EU sanctions on the nation due to Tehran's nuclear program.

In its latest threat, "Iran intends on blocking any oil tanker en route to countries no longer buying Iranian crude oil because of the now fully imposed economic sanctions," said Bob van der Valk, a petroleum-industry analyst based in Terry, Mont.

But historically, Iran's willingness and ability to follow through with its threats have been slim -- and the oil market knows that, analysts have said. Read about Iran's history of oil threats.

Besides, "Saudi Arabia will flood the crude-oil market to punish Iran if they shut down the Strait of Hormuz for shipments of Middle East crude oil," said van der Valk.

And it has plenty of oil to do it.

Even though it was producing 10 million barrels per day during the first quarter of this year, the Saudis still have 2.5 million barrels per day of official spare capacity, which represents almost 70% of Iran's total 2011 output of 3.6 million barrels per day, said Argent Capital's McDonald.

"There are plenty of reported loopholes in both the U.S. sanctions and the EU insurance ban [on Iranian oil shipments], so Iranian exports will be hurt a little more, but not enough to exceed the Saudi's ability to cover the reduced supply," he said.

Prospects for $100 WTI oil

So the $100 level remains within reach -- it just doesn't appear likely anytime soon.

WTI oil at $100 and beyond is "never out of reach," said Tariq Zahir, managing member at Tyche Capital Advisors, suggesting hurricane activity in the Atlantic and a potential third round of quantitative easing in the U.S. on the back of worsening jobs figures as among the factors that could lift prices.

The most obvious factors that could lift prices back above $100 include a conflict in the Persian Gulf, such as an Israeli attack on Iran's nuclear facilities, or a major supply interruption from Venezuela, Iraq or Libya, according to James Williams, an energy economist at WTRG Economics.

"The probabilities of those are not high in the next three months but certainly possible," he said.

Near term, Williams sees $80 or lower for WTI, with a 40%-50% chance of $60 before year end under a U.S. recession scenario.

"In the last 40 years, recessions have always led to a price collapse," he said.

Van der Valk expects Brent crude prices to "hover" around $100 a barrel for the rest of the summer.

He also said, however, that "all bets are off if crude-oil shipments from the Middle East (other than Iran) are interrupted."

The "only ace Iran has left" would be if an Israeli bombing of an Iran nuclear facility starts "an all-out war," with partners of the Organization of the Petroleum Exporting Countries having to pick sides, van der Valk said.

Under that scenario, all bets are also "off the table on forecasting gasoline prices," he said.