Commodities Corner: Oil market should worry but not fear Iran

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SAN FRANCISCO (MarketWatch) ?€" Iran?€™s latest saber-rattling has made its mark on the oil market already, contributing to a rally in U.S. prices to more than $102 per barrel, but while nervousness in the market over Iranian threats is warranted, outright fear is not.

In other words, oil prices may have just gotten ahead of themselves.

Oil futures /quotes/zigman/2203135 CLH2 +1.71% closed Thursday at $102.31 a barrel on the New York Mercantile Exchange for a year-to-date gain of 3.5%.

In terms of oil market sentiment, ?€œ?€™afraid?€™ would not be the word, but a ?€˜little nervous?€™,?€ said James Williams, an energy economist at WTRG Economics. ?€œIran speaks loud but isn?€™t known for carrying through on its threats.?€

Iran cites nuclear gains, says it's ready to talk

Iran announces advancements in nuclear fuel production while also offering to return to negotiations about the program, as Tehran comes under growing pressure to dial back its ambitions. Photo: Reuters

Still, those threats are hard to ignore. Iran has warned that it may block the Strait of Hormuz, a key shipping route for oil, or disrupt crude supplies to Europe in retaliation for European Union sanctions on the nation.

Tension between Israel and Iran is also worsening, and Iran has been boldly displaying its nuclear achievements in defiance of the West.

?€œAll the talk about Iran and market disruption, especially the militaristic saber-rattling, much originating with Iran, does lead to higher oil prices,?€ said Byron King, editor of investment newsletter Outstanding Investments. ?€œIt all makes markets nervous. This pushes oil prices upwards.?€

Oil futures prices are trading at their highest level in six weeks. And, understandably, much of the climb has to do with Iran, which is the world?€™s third-largest exporter of crude after Saudi Arabia and Russia. Read about Thursday?€™s action in oil.

?€œRecent oil gains are warranted and historically, events in Iran have always moved global oil prices,?€ said Mark Williams, a former energy trading-floor executive in Boston who teaches finance at Boston University.

It was one of the ?€œoriginal gang of five?€ that founded the Organization of the Petroleum Exporting Countries in 1960, and ?€œwhat Iran does has and will always matter when it comes to moving oil prices,?€ he said.

?€œThe influence of an externally imposed boycott on Iranian oil or [Iran?€™s] unwillingness to send oil to the West has the same outcome: Supplies fall and prices rise,?€ he said. Read about the spread between WTI and Brent crude prices.

History lesson

But if history is an accurate enough model, confidence in Iran?€™s willingness and ability to follow through with its threats should be slim.

?€œHow many times has Iran held ?€˜naval exercises?€™ and threatened to close the Strait of Hormuz??€ said Anthony Sabino, a lead attorney at Sabino & Sabino, a practice that offers legal counsel to the oil and gas industry. ?€œMost people have lost count.?€

Reuters

Iran test-fires a new medium-range missile from a naval ship during the last days of a naval drill on the Sea of Oman near the Strait of Hormuz in southern Iran.

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