Oil markets reacted Monday to a naval escalation near Dubai, highlighting on-going tensions in the Persian Gulf region. Oil prices Friday surged higher following economic statements from China, which has experienced economic stagnation but not the hard fall predicted by some market analysts. The opening of an oil pipeline in the United Arab Emirates during the weekend may have taken some steam out of this week's crude oil prices, but military tensions in the Persian Gulf region trumped any significant physical market conditions.
Brent crude oil prices rose more than 1 percent Monday to $103, with U.S. crude oil settling at just over $88 per barrel, a value not seen since late May. Barring some refinery shutdowns in the United States, much of that reaction was likely in response to incidents in the Persian Gulf. Last week, the U.S. military sent more military assets to the Persian Gulf and Monday, a U.S. Navy ship fired on what turned out to be a non-military vessel in the region. One person died after the USNS Rappahannock fired its .50-caliber machine gun at an approaching boat that had apparently "disregarded warnings" from U.S. military personnel. Though the U.S. military was quick to defuse the situation, it was enough to send a recession-wary market into overdrive by late Monday.
U.S. and European sanctions targeting the Iranian energy sector are barely two weeks old, though markets had more than six months to prepare. South Korea reported that, by June, its imports of Iranian crude oil had declined more than 20 percent from the previous year amid increased sanctions pressure. New Delhi, meanwhile, has seemingly grown frustrated with finding ways to pay for Iranian crude and switched its focus over to Azeri markets. Once one of Iran's largest buyers of crude oil, New Delhi officials said they might move away from Iranian crude oil completely as European sanctions in particular make it more difficult to continue with its business-as-usual model.
A $3.3 billion oil pipeline went into service during the weekend that bypasses the Strait of Hormuz. Iran, during the weekend, said its forces maintain the ability to control the key strait and could prevent "even a single drop of oil" from getting through. While any reaction to the crisis involving the USS Rappahannock incident was likely of the knee-jerk variety, analysts were quick to point out the situation in the region was increasingly "fragile." Outside of the region, drilling for oil and natural gas in the North Sea is up more than 60 percent historically, but that did little to distract from tensions in the Middle East. Expiring contracts for Brent crude for August were up 1.2 percent during the early part of the week, with September crude up $1.95 to $103.37 per barrel.
By. Daniel Graeber of Oilprice.com