2019-10-22 09:41:271970-01-01 00:00:00

Oil Price Surges

The price of oil has surged overnight after two oil tankers were attacked in the Oman gulf. The attack occurred close to the East entrance of the Strait of Hormuz, one of the world’s most important oil arteries.

The Japanese-owned, Kokuka Courageous and Norway’s Front Altair were bombed by sophisticated military-grade weapons around dawn local time, forcing both crews to abandon ship.

The United States Secretary of State Mike Pompeo blamed Iran of being behind the attacks in a press conference shortly after the incident. He announced that United States intelligence described that the expertise required, weapons used, other recent attacks by Iran, and that no other proxy groups within the region having the resources or sophistication to conduct the attack, confirmed Iran was responsible. He also stated that Iran is clearly a threat to international peace and security.

The Lowy Institute has also announced this morning on the ABC, in agreeance that the evidence indicates that a state actor was involved, most likely to be Iran. He also stated however, that the United States needs to be able to provide more evidence to substantiate its claims as the facts emerge in the coming weeks. The UN Secretary General also weighed in saying facts must be established and those found to be responsible will face consequences.

The President of Iran Hassan Rouhani denied responsibility for the attack. He announced that America should not be trusted and that he had given up trying to negotiate with the Trump administration. He denied any involvement behind the attacks and said that his Navy rescued the crew members involved.

Over a third of the world’s oil passes through the Strait of Hormuz. Stability within the strait is highly important for the global oil price as everyday 15 million barrels of crude worth hundreds of millions of dollars is transported through. The strait is only two miles wide and has only one shipping lane in each direction.

Iran has threatened that if the United States continues to hurt its oil exports by not lifting export sanctions, it will close the strait,  cutting off access to the Persian Gulf. This would not be unprecedented. In the eighties, Iran seized the strait in what was known as the Iran-Iraq ‘tanker wars’. The two oil rich nations attempted to shut down each other’s oil exports by attacking each others tankers. Over two-hundred were bombed.

The Middle East is one of the three oil hotspots of the world. The other two are in the North Sea and the United states. Any instability within these regions will significantly shift the price globally. Any news that indicates a reduction in supply such as last night’s attack in the Gulf of Oman, is reflected in oil markets moving significantly higher.

This was the case overnight. The global benchmark, Brent oil futures on London’s ICE Futures exchange  immediately rose by 2.2% and was up over 4.5% during trade before trimming back and closing up by 3.78% at $US62.04 per barrel.

In the United States overnight on  the New York Mercantile Exchange, West Texas Intermediate futures (WTI) also reacted to the news optimistically up by 2.2%. It then moved throughout trade peaking above 4.5% before officially closing 2.2% higher at $US52.28 per barrel. Petroleum-dependent stocks on Wall Street also moved significantly in response to the oil price surge.

The lift of the oil price comes on the back of an oil market that has been trending downwards for quite some time. WTI closed yesterday down by over 20% since its peak last month. This was due to growing crude oil inventories in the United States indicating weaker demand globally. However, last night’s incident quickly prompted an about turn for the oil market.

Companies within the energy and materials sectors tend to do better after the price of oil rises while those dependent on oil tend to suffer. This has been the case for Australia this morning with the energy and materials sectors within the ASX both trading up by 1.88% and 1.51% respectively.

Traders took advantage of the sentiment this morning. Beach Energy (BPT), an oil and gas exploration and production company was up by over 5% in early trade before simmering off and returning to where it started. Santos (STO) also started the morning off sharply higher than where it closed yesterday and managed to sustain the growth well into the afternoon trading up 2.8%. Qantas (QAN), a company which could be hurt by a rising oil price managed to trade today practically unscathed, trading flat.

As the instability within the Middle-Eastern gulfs, and the relations between the United States and Iran become increasingly exacerbated. The price of oil is expected to remain turbulent.

By Isaac Batterham

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