The increasing isolation of Iran on the global scene could send crude oil prices soaring, feels Jal Irani, Managing Director - Oil & Gas Research, Macquarie Group. "We see a material upside risk to crude prices because of Iran," he told CNBC-TV18 in an interview. Macquarie estimates that roughly USD 2.5 million barrels (oil) per day is at risk because of the festering tension in the Middle East triggered by Iran's belligerence regarding its nuclear policy. Irani feels the Organisation of Petroleum Exporting Countries (OPEC) will find it difficult to match this shortfall, says Irani. Already, many countries have already stopped importing oil from Iran, while some others, India include, have reduced their purchases from Iran. "Even if OPEC matches supply (of 2.5 mbpd), further headroom will be low... a (potential) war in Iran could lead to a significant oil shock," he says. At the current price of around USD 123 per barrel, crude prices have risen 15% in the last couple of months (45% over the last one year) since the problem over Iran's nuclear stance surfaced. The high crude oil prices have severe implications for countries like India which are heavy importers of oil. Already in the first nine months of the current financial year (April-December), India's oil import bill has risen nearly 40% to USD 106 billion, and accounts for nearly 80% of the trade deficit. The problem comes at a time when the government is trying hard to control the widening current account deficit which is putting pressure on the rupee. Among the plays on the oil sector, Irani is bullish on BPCL and ONGC . Below is an edited transcript. Watch the accompanying video for more. Q: What are you penciling in terms of crude prices? Where do you think it may likely range for the course of this year? A: We believe there is a material upside risk to crude oil prices. The risk is in the form of Iran supplies decreasing. Essentially, the world right now has a surplus oil capacity of 3.8 million barrels a day. Iran itself produces 2.5 million barrels a day. The EU which consumes about 0.8 million barrels a day has firmly stated that by the middle of this year it is going to stop consuming from Iran and there is pressure on Asia to similarly do so. As a result, press reports suggest India, China and Japan are going to reduce production by 10% fairly soon. We are essentially talking about 0.9 million barrels a day going out very quickly and over a period of time a total of 2.5 million barrels a day at risk from Iran. Out of the spare capacity of 3.8 million barrels a day, 2 million barrels a day are with OPEC members other than Saudi Arabia. Now at USD 125 per barrel, we feel these OPEC producers are anyway producing full blast. So, one gets the feeling that there isn't really spare capacity on that front. Even Saudi Arabia, with 1.8 million barrels per day spare capacity, they claim they can turn the taps on in about a month's time. I suspect that's never been tested and also if they do indeed turn the taps on then they fire all ammunition. Therefore, one is looking at severe shortages in oil and perhaps we are already at that stage where there is not material oil available in the world already. Therefore you can see prices relentlessly going up. In the worst case scenario that there is a war in Iran then the Strait of Hormuz which it controls, about 20% of the world's oil trade takes place through that. Now that is going to be a very severe situation because from what our understanding is the Strait of Hormuz is potentially going to be targeted specifically by Iran where it does enjoy some significant strategic advantages. So the risks are indeed significantly on the upside. Q: What would that translate into for a target range? You said we are already sitting at USD 120/bbl? The fear is how markets may react if it actually shoots to about USD 150/bbl? A: For the moment oil prices have already surpassed that target range. I would think the risk is indeed on the upside. I can't say at the moment what price we are looking at because beyond a certain level we should also be seeing price destruction but these premiums at the moment are only likely to rise.

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