Will oil’s eight-month high derail global growth?

Increasing tensions between the West and Iran have helped push Brent crude to an eight-month high of $121 a barrel, leaving many concerned over the longer-term impact.

Brent crude today reached $121.15 after Iran pre-empted an expected EU embargo on imports by cutting oil sales to both the UK and France, with some suggesting current price levels could act as a drag on global growth.

"Any discussion of upside risk coming from [recent] data needs to be tempered by recent concerns emanating from energy markets," said J. P. Morgan chief economist Bruce Kasman in a note to clients on Friday.

"Although some of this [oil price] increase reflects shifting expectations about economic growth, the latest move up also likely reflects concerns surrounding a possible oil embargo on Iran," said Kasman.

Capital Economics believes the ‘Iran premium' has added at least an extra $5 per barrel to current oil prices but, crucially, believes the Iranian regime may be close to backing down.

The forecaster notes the ban on sales of crude oil to the UK and France incorporates just 60,000 barrels per day (bpd), and highlights Iran has not followed through its threat to stop sales to the likes of Italy and Spain, who together account for 320,000 bpd.

"This is a sign of weakness from Iran, not strength," said chief global economist Julian Jessop, who also pointed to the regime's difficulty in finding alternative buyers for the 500,000 bpd it sells to Europe as a catalyst for a drop in prices.

"The fact that Iran is struggling to sell additional oil elsewhere suggests that the market is not as tight as current prices imply," said Jessop.

With the US also set to impose punitive measures on Iran, the sabre-rattling has also increased fears that military action may not be off the table.

Kasman suggests a removal of 1 million barrels per day from the oil supply, sustained for a year, would raise oil prices by 26% and reduce global GDP by 0.5% - though this does not account for any subsequent release of emergency reserves.