Oil price rose sharply in European and American trading yesterday, driven by a combination of optimism about a global economic recovery, as well as growing concerns over Middle East tension.
Brent crude Tuesday trading at US$112.27 a barrel, up almost $5 in a single day, while US West Texas crude shot up over $4 to $102.96. West Texas Intermediate (WTI) and Brent Crude (Brent), the global benchmark oils have not traded above this level since May 10 2011.
Much attention has focused on the implications of Iranian war games and threats to close the Straits of Hormuz, a narrow shipping channel and vital outlet for the Gulf oil producer’s crude and Qatar’s LNG.
However, Iranian rhetoric and bluster isn’t sufficient to explain the steep rise.
Economic performance indicators from Germany, China, the US and India suggest a slightly rosier outlook for the coming quarters, aided by a smaller-than-expected decline in manufacturing in some European countries.
Iran’s threat to close the critical outlet for 15% – 20% of the world’s exported oil supply has continued to antagonize its neighbours, the EU and the US. The latest round of sanctions hold a greater threat to Iran’s economy, effectively blacklisting from all US trade anyone doing business with the Iranian central bank, through which payments for oil are received. The recent sanctions have been precipitated by Iran’s refusal to halt its nuclear programme, which is widely believed to go beyond bounds of purely peaceful electricity generation.
Iran’s 10 day war games in the Gulf of Oman, which included test firing of missiles, coincided with the scheduled departure of a US aircraft carrier from the Gulf. Two more US carriers are currently making their way towards Gulf waters.
Whilst the threat of an export cut-off would be hugely damaging to the regional economies of Kuwait, the United Arab Emirates, Qatar in particular (Saudi Arabia has export terminals on the Red Sea), the inflated oil price caused by the tension largely serves to increase the cash surplus each country can build on top of their break-even projections, which are typically around $78 – $85 a barrel.
The greater economic threat is that oil prices skyrocket to more than $140 a barrel and derail an extremely fragile global economic recovery. When the recession finally hit oil demand in 2009, WTI oil sank to around $35 a barrel for several weeks, before beginning its escalation back to $80+ territory where it has largely remained since.
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