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Sabotage: The Latest Risk to Crude Supply

05/13/2019 11:30 am EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

A number of ships were sabotaged near the Strait of Hormuz adding another risk factor to the price of crude, reports Phil Flynn. Phil is participating at the MoneyShow Las Vegas

Oil prices ignored trade war fears and instead focused on increasing risks to supply. Reuters reports that the United Arab Emirates (UAE) said on Sunday that four commercial vessels were sabotaged near Fujairah emirate, one of the world’s largest bunkering hubs lying just outside the Strait of Hormuz, but did not describe the nature of the attack or say who was behind it.

The UAE had not given the nationalities or other details about the ownership of the four vessels. Riyadh has identified two of them as Saudi, and a Norwegian company has said it owned another. Details of the fourth ship were not immediately clear.

Iran, which is embroiled in an escalating war of words with the United States over sanctions and the U.S. military’s presence in the region, moved to distance itself on Monday. Iran’s Foreign Ministry called the incidents “worrisome and dreadful” and asked for an investigation into the matter, Reuters said.

This attack raises the stakes for oil and will add more volatility. Yes, trade war concerns can have an impact on demand down the road, but geopolitical events can impact oil supply now. This is very true especially against the growing threat from Iran.

As I wrote last week:  “In the past, the market has taken grandiose threats from Iran to close major oil routes with a grain of salt, the Trump administration is taking them seriously. If Iran closed the Strait of Hormuz it would lead to an immediate military response, not only by the U.S. but by the rest of the world. This waterway is so critical for the global economy; the world would have no choice but to respond. Even if this waterway was shut down just for hours, it more than likely would cause a major oil price spike.

According to the Energy Information Administration’s latest data, the strait accounts for 30% of all seaborne-traded crude oil and other petroleum products. The loss of that supply because of military action would cause panic, and while it is doubtful the Iranian military has the ability to keep the strait closed for an extended period of time, it might not matter because the oil price spike would have already happened. The damage to your wallet, as they say, would already be done.”

Add this to the lower output from Venezuela and the OPEC cuts and we are seeing increased risks to the upside.

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