SAN FRANCISCO (MarketWatch) — There was an unintentional showdown Thursday between the U.S. Federal Reserve and Iran. The Fed won, and here’s how we know: Oil prices rose.
After weeks of mounting tension over Iran’s rogue nuclear program, Iran finally cried “uncle”. Reports from Tehran indicate President Mahmoud Ahmadinejad is willing to resume talks to defuse the powder keg created by U.S.-European moves to ban Iranian crude imports and Iran’s vow to retaliate by shutting the Strait of Hormuz.
At stake is the safe transit of about 20% of the world’s oil through the strait, which by anyone’s standard is a pretty convincing reason to bet oil prices might head higher.
So when Iran suddenly says “Let’s talk”, you’d think oil traders would pull some of that fear premium out of the market.
They didn’t. Instead, the March crude-oil futures contract briefly jumped more than $1.60, hitting an intraday high of $101.39 a barrel in New York. Read the latest on oil prices.
What gives? Well, basically Iran became a sideshow to Ben Bernanke in the crude-oil trading pit.
The Federal Reserve Chairman’s announcement Wednesday that U.S. interest rates will likely be kept near zero through 2014 sent the dollar to a seven-week low. Since oil is a dollar-denominated commodity, a drop in its value brings down the value of a barrel of oil. Producers are especially sensitive to such currency fluctuations and will do whatever they can to close the value gap.
But crude is also increasingly used as a hedge against a weak dollar. When the value of the greenback slips, you can count on a savvy bunch of investors to move money into oil futures to catch their relatively predictable upside reaction.
Another reason oil prices rose Thursday is because the Fed’s long-term, low-rate monetary policy aims to stimulate the economy. Economic growth typically pushes up energy demand, yet another reason to “go long” on oil.
Add it all up, and the Fed’s latest policy pronouncement simply killed any inclination to otherwise sell off crude based on Iran’s toned down rhetoric.
So, at least for the time being, Bernanke is wielding a mightier sword in the crude market than a suddenly dovish Ahmadinejad.
Of course, with about 80% of Iran’s foreign currency revenue linked to oil, Ahmadinejad isn’t likely to mind.
— Jim Jelter
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