Global energy prices are moving sharply higher Tuesday morning on news that Iran was threatening to disrupt oil supplies by blocking the Strait of Hormuz waterway. Brent crude topped $100 a barrel for the first time in three weeks and U.S. oil futures for August delivery gained nearly 5 percent mid-morning before easing to $87.71 a barrel.
On Monday, Iran scheduled drills to test missiles that were capable of hitting targets as far away as Israel, stoking fears that the country is trying to produce a nuclear weapon, according to a Wall Street Journal story.
The New York Times reports Tuesday that the U.S. Navy has quietly been increasing its presence in the Persian Gulf to discourage Iran from freezing ship traffic in the Strait. Iran's National Security and Foreign Policy Committee has also introduced a bill that would try to stop oil tankers from passing through the Strait of Hormuz, a move seen by analysts as retaliation by Iran against European nations that abide by new economic sanctions. Europe implemented tougher sanctions against Tehran July 1 over the country's nuclear energy program, which has made it difficult for Iran, OPEC's second-largest oil producer, to find buyers of its crude. (See: The Looming Threat to Gas Prices: Strait of Hormuz Explained)
Beth Heinsohn, a senior news editor at OPIS, says rising U.S. oil production in North Dakota and South Texas insulates parts of the country from potential oil shocks. But consumers on the East Coast are more likely to see higher prices because local refiners are more dependent on crude imports from overseas.
The $15 price gap between Brent crude and U.S. crude will likely widen Heinsohn says as tensions with Iran heat up again and Norway oil workers continue striking. The 10-day Norwegian trade union strike has cut daily Norwegian oil production by an estimated 13 percent and has resulted in delays to crude shipments. Heinsohn says energy market indicators are becoming more bullish and could push prices higher in the near term.
Lower oil prices last week were likely a bottom, she adds, and gasoline and heating oil prices will move in tandem with crude oil. The national average price for a gallon of gasoline is $3.33, a six-cent drop from the previous week, according to AAA's Daily Fuel Gauge Report. U.S. gasoline prices averaged $3.56 exactly one year ago.
Heinsohn says Iran's saber rattling in April was a big part for the jump in energy prices but other factors this summer season will keep prices elevated. Hurricanes, greater consumer demand and now the U.S. and European Iranian oil embargoes will drive oil and gasoline prices higher until at least September.
There are bearish factors on the supply side that could offset any major price spikes including increased oil production by Saudia Arabia and a commitment by world leaders to tap oil reserves.