Crude Oil Up Strongly On Iranian Provocation

Crude rallied strongly today due to both, fundamental factors, and an increase in the risk to shipping within the Strait of Hormuz. During late Sydney trading, WTI prices broke through resistance and soared to a new 2015 high of 59.86. The major catalyst of which was improved crude inventory figures at Cushing as well as an inflammatory move by Iran to seize a cargo ship within the critical Strait of Hormuz.

Figure 1.0 - Daily transit volumes through world maritime oil chokepoints

Source: Energy Information Administration

Although the seizure of a ship is hardly unprecedented in Iran’s history, it comes at a fragile time where there is much unrest within the Middle East. The Marshall Islands flagged ship, the Maersk Tigris, was intercepted by Iranian Revolutionary Naval patrol boats on Thursday and forced at gun point to alter course towards Bandar Abbas.

Subsequently, the Pentagon has confirmed that action would be taken to protect US shipping within the volatile region. A further Pentagon announcement stated that US Navy assets would therefore provide escort protection for US ships transiting the area which neighbours Iran.

The consolidation of military assets within the region sends a strong message to markets that the United States will take all actions required to keep the critical trade route open. However, it also ratchets up the possibility of a confrontation between Iranian and US Naval forces which could spark a significant incident. Considering the location of Iranian naval assets at Bandar Abbas, and the confined nature of the strait, their ability to interrupt the free movement of shipping is real.

Obviously, the increased tension adds an additional risk premium to crude prices and is likely to provide further buoyancy to the commodity as Iran plays its game of brinksmanship. Even the mere threat of an interruption to the supply chain is likely to send oil prices soaring and cause further economic destabilisation to countries within the region.

Expect to see Iran use the threat of shipping disruptions, rather than an actual incident, to attempt to influence the current weapons blockade that exists in Yemeni waters. This blockade has greatly angered the Iranians who believe their right to support Houthi rebels in Yemen has been impinged.

Ultimately, Iran is attempting to play a game of regional hegemony whilst striking at the soft under belly of the west, the crude oil supply chain. Expect to see oil continue to remain buoyant as long as the brinksmanship over the Strait of Hormuz continues.

Technical Aspects

As WTI oil continues its push towards $60 price/barrel, traders start to eye potential resistance on the upside. Price currently is trading slightly above the 23.6% Fibonacci level and traders are likely to look for a confirmed break of the $60 price level. A confirmed run above $60.00 price/barrel is likely to put the 38.2% retracement level in sight at $67.95.