Crude Oil Rallies on Iranian Tension

The price of sweet light crude oil futures has steadily rose throughout the month of February. The month ended with the price of Cushing Crude Oil on a 9-month high at $107.07 per barrel. Overall, the price went up 9.6% last month, which is the second highest percentage increase in a month - after October - over the last year. The final two weeks of February in particular were brutal, with the prices increasing almost daily. Iran may have been the primary driver of the run-up in prices, as the country's nuclear program is at the epicenter of a sense of growing tension between Iran and the West. Iran's reluctance to stop its nuclear program and its recent threats to close the Strait of Hormuz has significantly added to the discord. Moreover, the Iranian oil bourse will no longer trade in US dollars from March 20 onwards. After that date, Iran will start trading oil in other currencies, like the euro, yen, and rupee as well as gold. It is an unprecedented event and undermines the US dollar as the common currency for trading oil. Some of the effects can already be seen in the US, with the price of gas per gallon crossing $4 in some states. Before even Iran, the dramatic political tensions seen in many major Middle Eastern countries back in early 2011 demonstrated how volatile oil prices can be, as oil reached a high of around $113 per barrel. As of late, there have been uprisings and protests in many oil producing countries, such as Syria, Egypt, Kuwait, Jordan, Iraq, Bahrain and Oman, to name just a few. It seems it will take time for stable governments to reemerge in the Middle East and Northern Africa. Europe's embargo of Iranian oil, which is set to begin this July, is another factor affecting oil prices. In response to Europe's planned embargo, Iran has decided to cut off France and the United Kingdom from its oil. If Iranian oil no longer reaches to the European countries currently facing debt problems, like Greece and Portugal, the problems in those countries could spill over and already tense economic situations could worsen. For Iran, redirecting its oil supply to Asian countries remains its strongest alternative to the European markets. However, the European Union's sanctions are impeding the movement of oil from Iran to Asian countries. For example, the International Group of P&I Clubs, which provides marine insurance for almost 90% of the tankers in the world, is located in London and is subject to EU laws. India and China are trying to find ways around these sanctions by providing sovereign insurance, while Japan and Korea on the other hand are trying to reduce dependency on Iranian oil. Even though the oil prices have dropped over the past couple of days, with many investors feeling that oil prices have escalated to unnecessary levels, tensions with Iran and the climate of political unrest in the Middle East does not seem to be ending any time soon. Also, with the US economy continually showing signs of recovery, the price of oil looks destined to increase this year, with the possibility of oil reaching $120 per barrel very likely. That would be a level not seen since the economic crisis started in 2008. A hike in oil prices of this magnitude would likely put a dent in the US economic recovery and irritate countless Americans at the pump.