More Crude Gains as Iran Claims to Control The Persian Gulf

Today's gains don't mitigate the possibility of a continued decrease in bullish sentiment. File Image / Pixabay

Crude prices climbed minimally on Monday due partly to the international trade worries that drove prices in previous weeks; however, rising U.S. inventory and rising output from the Organization of the Petroleum Exporting Countries (OPEC) was said to have capped the gains.

West Texas Intermediate ended Monday's session 15 cents higher at $68.87 per barrel, while Brent rose 37 cents to $76.19 per barrel; prices pulled back after Genscape reported that inventories at the Cushing, Oklahoma, delivery hub for WTI rose by about 764,800 barrels from August. 21 through Friday.

Also, a monitoring committee found that OPEC producers cut their July output by 9 percent more than required in their output reduction pact; but this compared with a compliance level of 120 percent for June and 147 percent for May means they have been steadily increasing production.

Crude's gains on Monday do not negate the notion that bullish sentiment continues to wan - presumably much to the relief of U.S. president Donald Trump (who wants lower prices at American gas pumps) and emerging but fragile economies such as that of India: the latest indication was provided by the U.S. Commodity Futures Trading Commission, which reported that hedge funds and other money managers cut their net long WTI futures and options positions in the week to August 21, by 15,723 contracts to 341,132.

Investors also cut their bullish Brent positions by 11,985 contracts to 324,431 over the same period.

It's also worth noting that Monday's gains were heavily influenced by a strengthening equities market and news that the U.S. and Mexico agreed to overhaul the North American Free Trade Agreement.

Phil Flynn, analyst at Price Futures Group, remarked, "The trade deal with Mexico is definitely a supportive issue; opening those trade barriers up increases growth and increases demand expectations for oil."

However, the deal is so far merely in principle, and it remains for Canada to barter with the Americans in order to complete the trade agreement.

One event on Monday that could theoretically send crude prices skyrocketing depending on how it plays out is Iran claiming it has taken full control of the Persian Gulf and the Strait of Hormuz, a key oil shipping route in the Middle East; this was revealed in a statement from Tehran that it had "full supervision over the Persian Gulf" and that the US navy does not belong there.

Alireza Tangsiri, general of the navy of Iran's Revolutionary Guards, added, "All the carriers and military and non-military ships will be controlled and there is full supervision over the Persian Gulf; our presence in the region is physical and constant and night and day."

Although Iran's strategy is to seek revenge for the resumption of the U.S. sanctions by threatening the rest of the Middle East's exports, president Barack Obama's former national security adviser and four star general, Jim Jones, earlier told media that the Iranian Navy should be "wiped out" if any action is taken to block maritime traffic: "I personally would like to see, if they ever did something in the Strait of Hormuz, I would like to see their navy disappear."

Chloe Morgan, U.S. Naval Forces Central Command spokesperson, said in statement on Monday that if Iran follows through with its bluster and attempt to close down the channel, U.S. response will be swift: "The U.S. and our partners provide and promote security and stability in the region on a daily basis; together, we stand ready to ensure the freedom of navigation and the free flow of commerce wherever international law allows."

The reality is the crude market could quickly swing up or down depending on a variety of circumstances; PVM Oil Associates believes the market's most recent performances reflect "a tightening fundamental outlook on the back of looming Iranian supply shortages."