Fears of Military Action Against Iran Cause Crude Price Surge

Friday June 21, 2019

Geopolitical tension may cause ulcers, but it's undeniably the ticket to boosting crude prices, and fears that U.S. president Donald Trump will initiate some form of military action against Iran over the downed U.S. drone and the oil tanker attacks caused traders on Friday to push West Texas Intermediate to a 9 percent weekly gain, following a month of weekly losses.

WTI settled up 0.6 percent at $57.43, while Brent gained 69 cents to $65.14 per barrel - the latter putting Brent on track to gain about 5 percent for the week.

It's unclear, though, why trader worries have intensified, given that Trump has uncharacteristically downplayed any notion of military action against the Islamic republic and on Friday stated that he had aborted a strike because it would have caused a disproportionate loss of life.

Still, consultancies such as FGE Energy rolled out scenarios regarding the possible outcome of such hostilities, noting that the Iranians could increase their water bound activities in the Gulf of Oman, and that "a severe disruption to the transit of oil through this vulnerable route would be extremely serious."

Bart Melek, global head of commodity strategy at TD Securities, added that should disruption occur, it was "absolutely a possibility" that oil prices would skyrocket to $100 per barrel.

So focused has the trading community suddenly become on Iran that the other big geopolitical concern - the U.S. trade war against China - took a distant back seat on Friday, even though Beijing and Washington will soon resume talks to resolve the issue.

Alfonso Esparza, senior market analyst at OANDA, remarked, "Trade anxiety has died down, pushing energy prices higher as global growth will not be pressured by a prolonged tariff war."

Also relatively overlooked were some much-needed emerging positive fundamentals, in the form of the appetite for risk assets rising after European and U.S. central banks signaled possible rate cuts this week.

Meanwhile, aware of the hand-wringing that the Iran situation is causing, Brian Hook, the U.S. envoy on Iran, told a news conference in Riyadh on Friday that his country is "very pleased" that Saudi Arabia is making sure the global oil market will be well supplied.

Trump on Friday also spoke to Saudi Crown Prince Mohammed bin Salman about Middle East stability and the oil market.