Oil Dips in Volatile Market as Trump Spurs War Escalation Fear
Oil gave back some of the rally driven by speculation the US may join the Middle East conflict, with traders focused on flows through the region’s vital shipping chokepoint.
Brent futures retreated near $76 a barrel, while still about $6 higher than they were before the attacks.
The oil market’s main concern is the threat to vessel traffic in the Strait of Hormuz, through which about a quarter of the world’s crude shipments flow, and to supplies from Iran itself. However, early data from TankerTrackers.com Inc. show that Iran has actually increased its exports significantly in the days since attacks began, and there’s been no major disruption to Hormuz.
“The fact we are drifting lower again into the European session highlights a current elevated price level that is unjustified without an actual disruption,” said Ole Hansen, head of commodities strategy at Saxo Bank.
President Donald Trump on Tuesday demanded Iran’s “UNCONDITIONAL SURRENDER” and warned of a possible strike against the country’s leader — Ayatollah Ali Khamenei — in social media posts. The US is also moving more military assets into the region, including the USS Nimitz aircraft carrier strike group, which is sailing to the Middle East ahead of schedule.
The risks to prices have permeated across the oil derivatives market. Bullish options are fetching their biggest premiums in over a decade and volatility has surged to a three-year high. The cost of shipping crude from the Middle East to China is also up more than 50% since the attacks began.
The hostilities have also rattled wider markets, with investors seeking havens in assets like gold.
Israel launched surprise airstrikes on Iran’s nuclear sites late last week, but American weapons are seen as crucial to achieving a more complete destruction of Tehran’s atomic program than anything it can do alone.
Prime Minister Benjamin Netanyahu has sought to draw the US — which has provided defensive support against Iranian missile fire — deeper into the conflict. He told ABC News on Monday that the countries share a common enemy in Iran, and that it’s in America’s interest to support Israel.
Oil could break above $80 a barrel on headlines of US involvement, said Chris Weston, the head of research at Pepperstone Group Ltd. The shape of the futures curve suggests that traders are pricing in a much tighter market, he added.
The gap between Brent’s two nearest December contracts — a key indicator on long-term balances — has significantly widened since the attacks and was almost $3 a barrel in a bullish backwardation structure. Prior to the conflict, it was in a bearish contango pattern, signaling expectations of ample supply.
Meanwhile, US industry figures showed the nation’s crude inventories fell by more than 10 million barrels last week. That would be the biggest decline since last summer if confirmed by official data later on Wednesday.
Brent for August settlement was down 1.2% at $75.52 a barrel as of 10:51 a.m. in London after closing 4.4% higher on Tuesday.
WTI for July delivery lost 1.2% at $73.95 a barrel.
Source : Bloomberg
