Oil Prices Up on Potential for Hormuz Conflict

Joel Anderson  |

Oil prices jumped sharply to start 2012 as the markets appeared to react to the potential conflict emerging over the Strait of Hormuz. Threats by the Iranian government to close the strait have dominated the news of late, and the markets responded with oil prices jumping almost 4 percent.

Iran continued their aggressive posturing over the strait today, insisting that the United States not to return an aircraft carrier, the USS John C. Stennis, to the "Persian Gulf region." The Pentagon responded with a declaration that American warships will continue regularly scheduled deployments to the strait, with Pentagon spokesman George Little stating that "deployment of U.S. military assets in the Persian Gulf region will continue as it has for decades." The strategic strait, through which about 20 percent of the world's oil supply passes, has been at the center of global political drama ever since Iran responded to threats of oil sanctions for its nuclear program by threatening to close passage of oil through the strait. Since then, Iran has continued its saber rattling with naval exercises that reportedly included the test firing of a cruise missile.

While the closure of the Strait of Hormuz would represent a serious strategic threat to America, many strategists are skeptical about Iran's capacity or intent to do so, believing that it's a bluff designed to save face in the face of increased international pressure over the nation's controversial nuclear program.  "It's the latest round of Iranian threats and is confirmation that Tehran is under increasing pressure for its continued failure to live up to its international obligations," White House Spokesman Jay Carney said. "Iran is isolated and is seeking to divert attention from its behavior and domestic problems." In a CNN blog,  Geneive Abdo, director of the Iran program at The Century Foundation, furthered this sentiment by speculating that hardliners inside the country see a military attack as inevitable and are engaging in saber-rattling in order to save face and to avoid appearing weak.

Regardless of the threat's foundations, the effect on the oil market was clear. Commodities often see an increase in prices in January, but this year the concerns over Iran's threats helped push up the price of benchmark crude up in early trading. Combining with concerns about Iran, though, was data on the Chinese economy that seemed to indicate a continued rise in global demand.

"The supportive economic data and the geopolitical concerns are furthering the crude oil rally," said John Kilduff, partner at hedge fund Again Capital LLC in New York.

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