We can point to many reasons oil may have rallied over recent weeks, but none so compelling and disturbing as the possible path to war. Now some may call this “speculation,” but the reality is the risk of war is rising and the risk of losing oil supply is too. This is not just a fear play, though there is fear involved with Europe declaring an oil embargo on Iran and Iran putting an embargo on exports to France and the United Kingdom. The main reason oil is preparing for war is Iran's refusal to talk about its nuclear weapons program, so the odds of conflict continue to rise. Countries across the globe, mainly in Europe and Asia, are making purchases of oil to put away for the day that oil from Iran may no longer flow.
There is fear that Iran, with the help of perhaps another twisted regime, may try to close the Strait of Hormuz that is located between Oman and Iran, as almost everyone now knows. If you do not, the Strait of Hormuz connects the Persian Gulf with the Gulf of Oman and the Arabian Sea. Hormuz, according to the U.S. government, is the world's most important oil chokepoint due to its daily oil flow of almost 17 million barrels in 2011, up from between 15.5-16.0 million barrels per day in 2009-2010. Flows through the Strait in 2011 were roughly 35% of all seaborne traded oil, or almost 20% of oil traded worldwide.
The oil story goes beyond Iran. The United States is showing signs that it can no longer ignore the slaughter and murder that is being perpetrated by the remorseless and evil Syrian president Bashar al-Assad and his regime. Once it was said that U.S. military action was not on the table. Well, guess what, it has suddenly found its way back on the table. Iran of course has vowed to support the Syrian regime and has threatened perhaps a wider conflict in the region. There are fears of more repercussions as the European Union will put sanctions on Syria's central bank next week and impose a ban on air cargo flights into the EU and sales of gold and other precious metals.
Iran and Syria have also ratcheted up their hatred of Israel to a fever pitch and have tried to stir up more sectarian tension in Saudi Arabia and Bahrain. Also, we are seeing ongoing violence in oil producers like Iraq, Nigeria and the Sudan. We have tensions surrounding the elections in Yemen as well, and worries about the direction the government is moving in Egypt that runs along another important oil chokepoint known as the Suez Canal.
These fears are driving Brent crude sharply higher and also bringing up the U.S. West Texas Intermediate higher. The spike in Brent is raising gas price. The East Coast is still trying to adjust to the closing of refineries and the rest of the country with the closing of the big Hovensa refiner in the Virgin Islands. Gas prices are also on edge as fears that new EPA gasoline regulations could shutter another 12.5% of U.S. refining capacity.
Based on the crude curve comparing the Brent and WTI, the market is convinced that we will see something big happen in late April or early May. Let us pray that we can pull back from what the market is predicting for the world's future. Let’s hope that the sanctions change the hearts and minds of those that seem to prefer war and destruction.