U.S. nuke study on Iran erodes oil market risk

A view of a petrochemical complex in Assaluyeh on Iran's Persian Gulf coast May 28, 2006. A U.S. intelligence report showing that Tehran halted its atomic weapons program four years ago reduces the chance of a U.S. military confrontation with Iran and could erode the geopolitical risk premium on crude oil prices, analysts said on Tuesday.

WASHINGTON (Reuters) - A U.S. intelligence report showing that Tehran halted its atomic weapons program four years ago reduces the chance of a U.S. military confrontation with Iran and could erode the geopolitical risk premium on crude oil prices, analysts said on Tuesday.

The U.S. National Intelligence Estimate (NIE) took U.S. friends and foes by surprise after years of strident rhetoric from Washington accusing the OPEC member of pursuing a covert nuclear weapons program.

President George W. Bush said Iran remains a global danger, and that "all options" are on the table for dealing with Iran. U.S. Energy Secretary Sam Bodman dismissed the chance of the report affecting oil markets.

Still, U.S. crude oil prices fell nearly $2 to below $88 a barrel on Tuesday after the report was released, as traders saw a slimmer chance of a disruption from the world's No. 4 oil exporter.

"There has been a certain fear of a preemptive strike against Iran, and I think the most direct consequence of the (intelligence report) is that the risk - although not very high - of that has fallen away for the foreseeable future." said Samuel Ciszuk, Middle East energy analyst at Global Insight.

Analysts declined to put an exact dollar amount on the "fear premium" in oil prices to account for potential supply disruptions in major producers like Venezuela, Nigeria and Iraq. Some said such concerns were still adding about $10 a barrel to the oil price.

WORLD WAR III?

Tensions between Tehran and Washington helped fuel the record rally that sent prices up 40 percent to just shy of $100 a barrel from August to late November amid concerns of a supply shortfall ahead of the Northern Hemisphere winter.

Just last month, Bush warned that a nuclear-armed Iran could lead to World War III.

But experts said the intelligence report will make it harder for the United States to make a case for action by the United Nations Security Council, or to justify a unilateral military strike.

"It will make it harder to push for tougher sanctions on Iran, but most importantly it should seriously dent market fear of a U.S. unilateral strike on Iran," said Olivier Jakob at oil consultancy Petromatrix.

"In terms of getting an agreement on toughening up sanctions or taking military action, this lowers the risk," said David Pumphrey, a senior fellow at the Center for Strategic and International Studies, a Washington think tank. "If anything it serves to remove that geopolitical uncertainty."

WHAT'S IT WORTH?

Other analysts said oil traders will have a hard time parsing the dollar impact of the new intelligence.

"For oil prices, it's quite dramatic and certainly important," said James Placke, an analyst with Cambridge Energy Research Associates, the oil consultancy "But I'm not sure the market will interpret it that way."

The report will make it harder for the United States to enlist Russia and China - which both wield veto authority over U.N. Security Council actions - in any plan to slap sanctions on Iran, Placke said.

Any disruption to Iran's oil exports would be a catastrophe for tightly stretched global oil markets.

The Strait of Hormuz, arguably the most prominent "choke point" in the global crude oil trade, handles 17 million barrels per day of global water-borne crude oil trade, over a third of total global shipments.

Its two-mile-wide channel connects some of the biggest Middle East producers like Saudi Arabia with world markets.

If the Strait closed down, it would be four times bigger than the largest disruption to date -- the 1991 invasion of Kuwait by Iraq, which shut down about 4.5 million bpd.

(Additional reporting by Jane Merriman in London and Matt Spetalnick in Washington)

(Reporting by Chris Baltimore; Editing by David Gregorio)