Oil consuming nations, hedge funds and big oil refineries are quietly preparing for a Doomsday scenario An attack on Iran that would halt oil supplies from OPEC's second largest producer. Most political analysts and oil traders said the probability of military action is low but they caution the risks of such an event have risen as the West and Israel grow increasingly alarmed by signs that Tehran is building nuclear weapons. That has Chinese refiners drawing up new contingency plans, hedge funds taking out options on USD 170 crude and energy experts scrambling to determine how a disruption in Iran's oil supply however remote the possibility would impact world markets. Mr Bob McNally once a White House energy advisor and now head of consultancy Rapidan Group said that with production of about 3.5 million barrels per day, Iran supplies 2.5% of the world's oil. I think the market has paid too little attention to the possibility of an attack on Iran. It's still an unlikely event but more likely than oil traders have been expecting. Rising tensions were clear this week as Iranian protesters stormed two British diplomatic missions in Tehran in response to sanctions, smashing windows and burning the British flag. The attacks prompted condemnation from London, Washington and the United Nations. Iran warned of 'instability in global security. While traders in Europe prepare for a possible EU boycott of imports from Iran, mounting evidence elsewhere points to long odds preparation for an even more severe outcome. In Beijing, the foreign ministry has asked at least one major Iranian crude oil importer to review its contingency planning in case Iranian shipments stop. In India, refiners are leafing through an unpublished report produced in March to look at fall-back options in the event of a major disruption. And the International Energy Agency, the club of industrialized nations founded after the Arab oil embargo that coordinated the release of emergency oil stocks during Libya's civil war, last week circulated to member countries an updated four page factsheet detailing Iran's oil industry and trade. The document not made public but obtained by Reuters, lists the vital statistics of Iran's oil sector including destinations by country. Two thirds of its exports are shipped to China, India, Japan and South Korea a fifth goes to the European Union. Senior market sources at two major banks said that hedge funds, particularly those with a global macro economic bias, have taken note and are buying deep out of the money call options that could pay off big if prices surge. Sources said that open interest in USD 130 and USD 150 December 2012 options for US crude oil on the New York Mercantile Exchange rose by over 20% last week. Interest in the USD 170 call more than doubled to over 11,000 lots or 11 million barrels. Still more traded over the counter.

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