Will The Tension Between Iran And Israel Affect Oil?

| About: The United (USO)

Last week, the price of oil (NYSE:WTI) rose by 3.4%. United States Oil (NYSEARCA:USO) rose by 3.2%. The price of Brent oil increased 1.9%. Furthermore, the recent rise in the premium of Brent over WTI is worth noticing: During the month, the premium increased by 10.6%. Is the rising tension between Iran and Israel affecting the price of oil? Will oil prices continue to rise in the following weeks? Let's examine the recent developments in the oil market and figure out what's up ahead for oil.

The rise of oil has had a positive effect on energy companies' stocks, such as Chevron (NYSE:CVX) -- during August, Chevron's stock rose by 3.6%.

Gap Between Brent and WTI

During recent months, the gap between Brent and WTI hiked from nearly $10 at the end of June to over $20 during last week. I suspect some of the rise in premium might be related to the renewed tension between Iran and Israel. The last time the premium hiked by such a sharp rate was at the end of January, when the tensions between the two were talked about in the news. The sanctions on Iran already seem to have worked: Iran's production declined below the 3,000 thousand barrels per day mark. This decline, however, was offset by the rise in production of other OPEC members, including Libya. The main concern is that an escalation in the Middle East will result in Iran shutting the Strait of Hormuz -- nearly 20% of the world's oil passes through the Strait. For now, the market's reaction is mainly via the rise in the premium because Europe is likely to be first to be affected by an oil shortage in the Middle East. The U.S. will also be affected by this blockage because a major part of its supply comes from Saudi Arabia.

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Last week the U.S. oil stockpiles decreased again by 4.5 million barrels, reaching 1,062.1 million barrels. There is a negative correlation between the changes in oil stockpiles and oil prices -- i.e., as oil stockpiles decline, the price of oil tends to increase the following week. Since oil stockpiles declined in the past few weeks and given that there is a negative relation between stockpiles and prices, this could suggest (assuming all things being equal) oil prices will continue to rise during this week.

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Last week, U.S. oil production edged down by 0.25% (week over week), but was higher than the production level in 2011. Refinery inputs rose by 0.28%. Imports also declined by 0.6% compared to last week. This means the supply slightly contracted and could explain the decline in oil storage.


There are several reports that could offer some insight as to the progress of the U.S., including core durable goods and new-home sales reports. If these reports show growth, that could also positively affect oil prices.

In Europe, many traders still anticipate that the ECB will eventually start buying bonds; this move will help rally not only the euro -- as it lowers the EU currency risk -- but also major commodities prices. There are also speculations that Bank of China will act and issue a stimulus plan to jump-start China's economy.

What's the Bottom Line?

There are several issues that could eventually pressure up oil prices. Those include if the central banks of Europe and China act to (or at least hint of their intention) stimulate the economy, if the tensions between Iran and Israel take another turn for the worst (which could also pressure up Brent premium), and if the U.S. oil supply continues to dwindle.

For further reading, take a look at "Oil Prices - Outlook Aug. 20-24."

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.