Why Oil Prices Are Unfazed By The Iranian Military Threat
Investing.com | Jul 25, 2019 03:42AM ET
When a Swedish-owned tanker sailing through the Strait of Hormuz under the British flag was not the first time oil markets have essentially ignored threats to oil distribution in the Persian Gulf this spring and summer. As oil prices continue to shrug off rising geopolitical tensions in the epicenter of the Middle-Eastern oil trade, traders want to know if and when it will start to impact the markets.
Why aren’t oil prices reacting to the real and growing threat that the Iranian military poses to the safe and free passage of oil tankers through the Strait of Hormuz? Several factors are involved.
h2 1. Weakening Oil Demand Ahead/h2Signs that the producing around 12 million barrels per day of oil and is now exporting growing amounts of that oil to customers who are purchasing it to replace some Middle East oil. Weekly EIA data on U.S. oil production, storage, exports and use has been having a much more significant affect on prices than any geopolitical event in the Persian Gulf. American oil production and exports help keep a lid on prices despite the sanctions on Iran or the Iranian threat to oil shipments in the Gulf.
How long can these four factors keep oil prices down if Iranian aggression continues or even escalates? It depends.
A sustained rise in prices now might require the situations to change in more than one of the points listed above. If, for example, negotiations between the U.S. and China show promise and tariffs on Iran are eased in addition to some sort of bottleneck in the U.S. oil industry (a pipeline or port closure, for example), then we would likely see oil prices rise and remain elevated.
It is also possible that Iran could drastically escalate its attacks, leading to a new paradigm in which the market must change its expectations with higher prices. If Iran caused serious damage to (or sank) a tanker carrying crude oil, or caused an oil spill in the Gulf, we would likely see oil prices rise and stay elevated as long as the threat remained. This level of attack and disruption is not currently priced into the market, because most analysts believe that Iran is not self-destructive and does not want to destroy the Persian Gulf environment.
Traders who believe the regime in Iran is constrained by its own survival interests should be wary of predictions for these Persian Gulf tensions to have a serious impact on pricing. Those who think the Iranian regime is entirely unpredictable and perhaps erratic or irrational may expect an unforeseen drastic escalation that would end the status quo.
Get The News You Want
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.