The current fragile global economy is facing many risks. There is a risk of another erupting euro zone crisis, slowdown in China and a slower economic recovery in the United States. But the risk posed by the spike in oil prices is more serious and bigger than others. Iran Israel conflict is affecting the global economy.
The tension has grown to new heights after Israel has threatened to attack nuclear sites of Iran in few weeks or months to come. The imposing economic sanctions on Iran are also adding fuel to fire. If being attacked, Iran has threatened to close Strait of Hormuz at the mouth of the Gulf. Almost 35% of the oil shipped by sea and 20% of global oil production is transported through this channel. Any blockade would come with dramatic short-term consequences. China will be hit hard because more than 40% of the Chinese oil passes through the Strait of Hormuz. This means that Iranian oil is more important to China than Saudi Arabian oil is to America.
If Iran manages to maintain the blockade, there will be no exports from Iran too as most of their important tanker terminals are on the side of the Persian Gulf. Iran is an oil-driven economy and the oil sale accounts for more than 60% of tax revenue and 80% of export revenue. In fact, Iran's oil exports have fallen this month by some 300,000 barrels per day or 14%, the first sizable drop in shipments this year.
The International Monetary Fund has warned the world is not prepared for a new oil crisis. In a paper prepared for last weekend's G20 finance ministers' meeting in Mexico and released on Friday, the International Monetary Fund said developed countries had run down their emergency stocks while spare capacity in the OPEC countries is no more than their average capacity. Asian region has high dependability on middle-east crude as many of them take more than 90 percent of their crude from there. They will suffer the most. Countries like South Korea, which import petroleum but export refined products would divert their output to their own market because they would be concerned to secure their own domestic supplies. Exports from countries such as Malaysia and Indonesia could also fall, at least as a short-term response.
If the overall situation worsened will create an un-fill able gap in the global supplies with dramatic results. The oil price could skyrocket to all-time highs and might reach $200. The "fear premium" created out of this conflict has already added at least $25-30 to Brent crude and will add at least $60-80 if there is war type situation between Iran and US backed Israel.
Technically also, on a weekly chart Crude Oil has taken support at 21 moving average since November 2011 and is moving in an upward channel. Till few weeks ago it was finding $104 as a strong resistance which is 61.8% Fibonacci retracement of the down move from the highs of 2008 to the lows of 2009. In early February it broke that resistance convincingly and is trading above it. This is a typical example of resistance becoming support. It has also broken the downward trend line from the highs of 2008 which was earlier acting as a resistance. Now it has taken support on the same line. The break out which happened in early February 2012 on big volumes has confirmed the inverse head and shoulders pattern with a target of $134. MACD is above zero line and is not showing any divergence with price.
The current situation between Iran and Israel is becoming worse every day with fresh verbal salvoes which is making the scenario for Crude oil dangerous. Even if this situation doesn't arise, in anticipation of these events, it will surely complete its 100% Fibonacci retracement of the up move from the lows of 2009 to the highs of 2011 at around $115.
Technically Crude oil has to maintain 101 dollar as a strong support & break the upward channel around 112 dollar. Then the doors will be open for the new highs of roughly last 5 years. 134 dollar in that case looks likely. In case of a full-blown conflict $200 will be a cakewalk!!
Whether Israel will attack Iranian nuclear sites is this year's one of the most important question which has a 50-50 chance. But the cascading effects to the buildup of the conflict between Iran and Israel are surely being felt by the world economy. Just wondering, if that happens what will happen to the global markets and economy. Will it cause another global recession? Only time will tell.