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The Obama administration has been looking for a face saving exit from Russia’s Crimea adventure. Meanwhile, the dormant Iranian problem has resurfaced and caught eyes in Capitol Hill. Shrewd politicking by White House pundits has conjured up a novel way of appeasing Putin bashers by passing a bill for a billion dollar loan guarantee to Ukraine and punitive measures against Russia by imposing sanctions against it.

This has, however, resulted in a swift response from the Kremlin in the form of higher gas prices for Ukraine which will only add to Europe’s burden. After all, Russia’s state owned Gazprom supplies close to a third of the European requirement of gas.

In such a scenario, how well Obama saves his image will be proven in the Senate elections this November. We feel the answer lies in Iran, the country holding the next largest reserve of natural gas after Russia. This is despite that over the years the focus of Uncle Sam was to curb Iran’s role as a major supplier of energy. To aid this there was consistent discouragement over investments in Iranian energy segment.

Development of an alternative route for transferring Iranian energy assets to Europe could well had put to an end Kremlin’s blackmailing Europe via Gazprom. The importance of Iran increases here -- since barring Qatar, none of the Persian Gulf nations have so much scope in the natural gas arena.

However, this calls for a thorough reversal of preexisting foreign policy on Iran. It would also be more prudent than getting involved in Russia’s domestic mess and reliving the Cold War era.

April has witnessed front month future crude prices, reclaiming the $100 a barrel mark. The surge came in the wake of the Russian-Ukraine gambit and fear of reprisal from the West. Talk on both sides about the next move is making the market nervous about an active conflict.

On the domestic front, crude prices are edging up, owing to a persistent decline in supplies at the delivery point for the U.S. benchmark contract in Cushing. The drawdown stems from movement of oil to refineries in the Gulf. Crude got a further boost from news about an earlier expansion of a pipeline to raise the takeaway capacity at the Cushing, OK storage hub.

Iranian Dawn?

Iran holds the fourth-largest proved reserves of oil, apart from being host to one of the biggest proved reserves of natural gas. However, this is not a gratification for one of the top five producers of oil and the erstwhile third biggest exporter of the crucial commodity on the world stage.

Recent data suggests that Iran is focusing on developing its resource base and has even tried to tap foreign investors for this purpose. The desperation to make use of its underutilized energy resources is apparent. In an interim deal last November, Iran was allowed to export with a limit of 1 million barrels per day (bpd). However, with market data showing Iran breaching the pact for last four months, we are apprehensive of the outcome.

The demand for Iranian oil – especially in the emerging economies in Asia, including China, India, Japan and South Korea – has led the country to raise oil exports by 16% to 1.16 million barrels per day, though that rate is less than half of what it was before sanctions were imposed in 2012.

The advent of 2014 has also seen proactive Iranian oil minister Bijan Namdar Zanganeh formally inviting energy behemoths like Royal Dutch Shell plc (RDS.A - Analyst Report) and BP plc (BP - Analyst Report) to take part in the country's oil and gas projects.

On the natural gas front, Iran has already signed a deal with Oman to annually export 10 billion cubic meters of gas. The 25-year, $60 billion deal would start in 2015. However, for this, a billion-dollar pipeline is envisioned across the Persian Gulf.

The Traditional Rival Iraq

On the other hand, Iraq, the traditional rival of Iran, is also fast gearing up its energy infrastructure. The move, with its fair share of supporters in the West, is aimed to cushion against future disruptions like the ongoing one in Libya. We feel this would also relieve pressure on the greenback spiking a race for market share among OPEC members.

Our bullishness comes from the confidence showed by oil behemoths that have significant presence in the southern oil fields in Iraq. The world's leading oil companies have been expanding Iraq's giant southern fields: West Qurna-1 run by Exxon Mobil Corp. (XOM - Analyst Report), Halfaya run by PetroChina Co. Ltd. (PTR - Analyst Report) and Zubair operated by Eni SpA (E - Analyst Report).

Though trouble is steadily brewing in its backyard Libya, Iraq has already become the second largest OPEC producer. We feel the upbeat trend is slated to continue with infrastructural improvements at its southern Basra terminals. In the month of February, the nation clocked a 0.5 bpd sequential rise of oil sales to reach 2.8 bpd. For 2014, Iraq is targeting export to 3.4 bpd.

Too Much Oil, Not Enough Demand

The oil industry is going through a lean patch. Brent crude prices have witnessed a steady slide over the past five months owing to weak manufacturing numbers from China and Europe.

The saving grace, however, was the world’s largest oil consumer, the U.S., where crude prices were boosted by upbeat U.S. jobless claims and consumer confidence data. The commodity got some more support from a positive revision to fourth quarter GDP numbers. This has energized hopes for robust fuel and energy demand in the U.S. The bullish momentum was further propelled by an Energy Information Administration (EIA) report that showed a significantly higher-than-expected decrease in gasoline inventories, as well as oil production disruptions in Libya and Nigeria.

With excess production capacity around the globe, crude oil price jumps seems to happen only in response to real or perceived threats to the supply system, even if inventories are adequate as they are at present.

So Where Do Prices Go from Here?

We see limited fundamental support to crude oil prices at current levels and expect prices to pullback steadily over the rest of the year. An Iranian imbroglio and instability in Crimea are expected to keep prices extremely volatile over the next few months, though we do not expect either of the two variables to get out of hand. We estimate crude oil prices in the low-to-mid $80 range without these geopolitical worries.

End Note

President Obama's opting for peaceful solutions comes at a time when he has been portrayed as going soft on Russia’s actions in Crimea. That said, we are also witnessing the White House steering clear of Congress on domestic issues, such as limiting climate change. The Iranian and Crimean imbroglios signal are a good opportunity for Obama to take a more aggressive stance on international issues.

The Obama administration will have to take calculated moves ahead of the mid-term elections later this year. The Crimea disaster may be relegated to the back burner as Iran turns into the hotter issue, but the whole world is paying close attention to see if Obama is likely to slip on oil.

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