Oil Spikes As US Threatens To 'Zero' Out Iranian Oil Exports: What You Need to Know

Crude oil prices have rallied to their highest level since October 2018 thanks to geopolitical tensions.

Oil At Year's High

WTI grade crude oil was advancing 0.73 percent to $66.28 at the time of publication Tuesday, marking the third straight session of gains. After declining about 25 percent in 2018, oil staged a steady recovery in 2019 alongside other asset classes.

US Hardens Stance

The most recent spurt in prices has come on the back of a standoff between the U.S. and Iran.

The U.S. announced that all waivers to sanctions on Iranian oil imports will end next week. All buyers of Iranian oil — primarily China, India, Japan, South Korea and Turkey — have been threatened with sanctions if they do not stop buying oil from Iran by May 1.

The radical action is in a bid to weaken Iran economically and reduce its clout in the Middle East. Incidentally, the U.S. offered waivers to the aforementioned countries in November 2018 after it re-imposed sanctions on Iran.

In a Monday press briefing, Secretary of State Michael Pompeo suggested the move is a pressure tactic aimed at fulfilling the U.S. demand for ending Iran's nuclear pursuits and state-sponsored terrorism.

"Today I am announcing that we will no longer grant any exemptions. We’re going to zero — going to zero across the board," Pompeop said. 

"We have made our demands very clear to the ayatollah and his cronies. End your pursuit of nuclear weapons. Stop testing and proliferating ballistic missiles. Stop sponsoring and committing terrorism. Halt the arbitrary detention of U.S. citizens." 

Iran Hits Back

Responding to the U.S. threat, Iran has threatened to close the Strait of Hormuz, which is the major waterway for shipping crude exports from the Middle East. President Donald Trump suggested in a tweet that any shortfall in oil supply would be made good by supplies from elsewhere.

Although most analysts take Iran's threat as a vacant one, it could mean blockage of roughly 40 percent of the global oil supply if it is carried through.

The Outlook

Washington's hardened stance is expected to result in a near-term spike in oil prices at a time when conflicts are reviving in Libya, Venezuela is seeing a drop in production and OPEC spare capacity is tightening, CNBC reported, citing BCA Research.

The outlook for oil supply and prices depends on China's response to the U.S. sanctions, S&P Global Platt said, quoting analysts. Although China won't go to zero on Iranian oil imports, it might curtail production. At last check, the United States Oil Fund LP USO was advancing 0.8 percent to $13.78. 

Related Links:

EUR/USD: The Recovery Is Over

OPEC Production Hits Multiyear Low: What You Need To Know 

A satellite image of the Strait of Hormuz. Photo by the European Space Agency via Wikimedia.