We can point to many reasons why 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 to oil supply is too. This is just not a fear play, though there is defiantly fear involved with Europe declaring an oil embargo on Iran and Iran putting an embargo on exports to France and the UK. 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 Straits of Hormuz that as almost everyone now knows, is located between Oman and Iran. 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 US government, is the world's most important oil choke-point 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 percent of all seaborne traded oil, or almost 20 percent of oil traded worldwide.
The oil story goes beyond Iran. The US is showing signs that they can no longer ignore the slaughter and murder that is being perpetrated by a remorseless and evil Syrian President Bashar al-Assad and his regime. Once it was said that US 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 has also ratcheted up their hatred of Israel to a fever pitch and has tried to stir up more sectarian tension in Saudi Arabia and Bahrain. Also we are seeing ongoing violence in oil prducers 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 Suez Canal. These fears are driving Brent crude sharply higher and bringing of the US West Texas Intermediate higher as well. The spike in Brent is raising gas price. The East Coast that is still trying to adjust to the closing of refineries and the rest if 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 125% of US 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 the 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.
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