June 13, 2019 / 8:50 PM / a month ago

Breakingviews - Gulf oil risk response looks too sanguine

Oil tankers pass through the Strait of Hormuz, December 21, 2018. REUTERS/Hamad I Mohammed

NEW YORK (Reuters Breakingviews) - Perhaps a quarter of the world’s oil is shipped through the Strait of Hormuz. So threats to tankers in the area should worry traders. Yet a couple of attacks on Thursday brought only a 2.5% jump in the price of Brent crude, to just over $61 a barrel. It’s a mild reaction that puts a lot of faith in cool diplomatic heads.

Mike Pompeo, the U.S. secretary of state, blamed Iran for the attacks which left two tankers adrift even as Japanese Prime Minister Shinzo Abe visited Tehran. Tensions have simmered since U.S. President Donald Trump last year pulled out of a multilateral deal designed to limit Iran’s nuclear ambitions. The rhetoric thereafter has hardly been polite.

It’s possible to look back at prior Iran-related incidents and their impact on crude prices and take comfort. The U.S. Congressional Research Service did just that last August, discovering that more often than not they rose to some degree before the actual events in question, only to slide in the following month. That includes, for example, when the United States attacked Iran’s navy in 1988.

Short-term interruptions to oil shipping can be eased by releasing reserves. And in the medium and long term, market prices depend more on supply and demand than battles of words between governments, however inflammatory.

Yet this time there are reasons for greater concern. First, the standoff between Washington and Tehran is becoming pricklier, and any lasting Iranian throttling of the Strait of Hormuz would significantly affect supply. Second, crude prices have been volatile of late. They tumbled from a high of $86 a barrel as recently as last fall to the low $50s late in 2018, pushed back into the $70s this past spring and have been on the way down again. Another leg upwards wouldn’t be a surprise.

Financial-market traders seem to be hoping for the best in other ways. Their bets imply that the U.S. Federal Reserve will soon start cutting interest rates regularly, reversing several years of increases, when the central bank’s likely approach is more circumspect. Trump’s trade fights may not be resolved as easily as stock markets seem to expect, either. In the case of crude, relying on no one being dumb enough to let rhetoric turn into real conflict may be too sanguine.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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