Saturday, January 4, 2020

Crude Oil Spikes Higher as Conflict Between the United States & Iran Boil Over

Some are calling it bold, some are calling it reckless, others are just holding their breath in anticipation of what comes next in the aftermath of the drone air strike initiated by the United States administration, that resulted in the death of one of Irans top Generals, Qassem Soleimani.

This move caught not only the Iranian government by surprise, but the global markets as well, resulting in a massive spike in the price of oil overnight and into the Friday trading session.


(Chart sources, oilprice)

At one point both WTI Crude and Brent Crude were trading up over 4%, as a risk premium was slapped on the price of oil, due to the potential ramifications in the Middle East over this pre-emptive strike against Qassem Soleimani, a man considered by many to be the second most powerful man in Iran.

The Pentagon issued their reasoning for carrying out the air strike that took place on Thursday, Reuters reports;

"At the direction of the President, the U.S. military has taken decisive defensive action to protect U.S. personnel abroad by killing Qassem Soleimani," the Pentagon said in a statement.

"This strike was aimed at deterring future Iranian attack plans," it said, adding that the United States would continue to take necessary action to protect Americans and interests around the world.

The Pentagon further went on to state that they had intelligence that indicated that Iran Quds Force Chief Qassem Soleimani was responsible for numerous attacks against US personal and assets over the past few months, including having an active role in the recent U.S. embassy attacks that have taken place in Baghdad over the past week.

In true Trump fashion, the President took to Twitter, gloating about this recent "victory" by the U.S. Military, posting first just an image of an American flag, then later a statement by the U.S. Department of State Bureau of Consular Affairs, urging all Americans to depart Iraq immediately due to heightened risks;

These combined actions enraged Iran's supreme leader, the Ayatollah Khamenei, who took to the airwaves, vowing that there would be "severe retaliation" against the "criminals" who carried out this attack.

This severe ratcheting higher in global risk levels, resulted in a quick and sharp increase in the price of oil, of which I believe still has much higher yet to go if tensions are not eased in quick order, which is sadly unlikely.

Responding in kind were both gold and silver bullion, who also sharply traded higher in prices, hoping to offset some of the risk unfolding.


(Chart sources, goldprice)

However, after their initial spikes higher, both gold and silver bullion gave up some of their previous gains, trading lower at the time of writing.

If the price of oil continues to trade higher and higher, then you can expect that these short term gains for both gold and silver bullion are going to translate into much higher prices in the long term, as precious metals historically move higher as the price of oil does.

Unfortunately, the risk of runaway prices in the Crude markets is all too real, as I have previously written about, Iran resides in a key geographical location on the Strait of Hormuz, of which they have the ability to severely impact this key global shipping lane.

This is very important due to the fact that roughly 20% of the world's oil supply travels through the Straight of Hormuz, of which Iran has the ability to shut down, at least in the short to medium term.

Much of this oil travels to countries in Asia, including China, Japan, India and South Korea. All of whom do not wish to see conflict erupt in this region due to the impact that it would have on their economies.

This prompted China to issue a statement, "urging calm and restraint" by all of those involved.

Still, these countries would be far from the only ones affected, as a rippling effect would wash over the world as a whole, resulting in higher prices for manufacturers and thus consumers all across the globe. Potentially sparking a global recession.

Expect a bumpy ride moving forward, higher oil prices and increased conflict in the Middle East once again. I believe that this is far from over, lets hope I'm wrong.

- Source, As first seen on the Sprott Money Blog
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