After a US military drone was shot down by Iran, President Donald Trump tweeted “Iran made a very big mistake!” To retaliate, Washington even reportedly made an approval for military strikes on the Western Asian country. However, according to The New York Times, the United States later decided to refrain from launching any such attack.
Overall, the rising tension between the two countries has increased possibilities of disruption in crude shipments through the Strait of Hormuz, situated between Iran and Oman. Notably, the Strait is touted as the most important global passage for transporting crude.
Oil Price Moves North
The West Texas Intermediate oil price surged 5.1% or by $2.89 to $56.65 per barrel at yesterday’s close. Per the Dow Jones market data, the commodity’s gains in percentage and dollar-terms are the largest on any single day since Dec 26, 2018.
Stifling Crude Supply Line
The prime factor that is pushing oil price higher is the escalating tension between the United States and Iran. The Global Hawk surveillance drone, manufactured by the United States, was shot down by the Revolutionary Guard of Iran. Tehran, the capital city, alleged that close to the Strait of Hormuz, the drone had breached the airspace of Iran. However, Washington denied this accusation and added that the drone was intercepted over the international airspace. This latest drone attack follows the onslaught on two oil tankers that occurred on Jun 13 in the Gulf of Oman for which, the United States blamed Tehran.
The intensifying friction between the two countries could disrupt the shipment of crude through the Strait of Hormuz, responsible for the passage of 20% of the total crude oil being consumed in the world, per media report. Through the strait, majority of the crude volumes of countries like Kuwait, UAE, Iraq and Saudi Arabia are being exported. Iran has reportedly warned that if its economy is hit due to America’s sanction on its crude export, it will then attempt to thwart the passage of oil tankers through the strait. This could further constrain the global oil supply. The news in fact has already bumped up the oil price.
Hopes Harboured on Improving Crude Demand
The other key factor driving the crude is a prospective positive picture of surging oil demand. With news of a probable resumption of talks between the United States and China, there is strong optimism in the air that the ongoing trade war — responsible for denting global economic growth — could be resolved.
Moreover, with the recent signal from the U.S. Federal Reserve for a possible rate cut in its next meetings, could further strengthen global economic upturn, thereby boosting the commodity’s global demand.
Oil Stocks in View
Since the fate of crude exploration and production companies is positively correlated with oil price, the recent rally in the commodity’s price has therefore driven the stock prices of crude energy majors. The notable players are BP plc (BP - Free Report) , Royal Dutch Shell plc (RDS.A - Free Report) , Chevron Corporation (CVX - Free Report) and Exxon Mobil Corporation (XOM - Free Report) . The stocks inched up 1.8%, 1.8%, 1.1% and 1.7%, respectively, on a single trading day post the strained terms between Iran and America worsened following Trump’s stern tweet before the market opened on Jun 20. More momentum lies ahead for the stocks as global crude supply is tightening and crude demand might shore up. All the energy giants carry a Zacks Rank #3 (Hold), except Chevron holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The oilfield service players have also witnessed a spike in their stock price since they help the explorers in effectively setting up crude wells. Schlumberger Limited (SLB - Free Report) and Halliburton Company (HAL - Free Report) , the top two oilfield service players in the world, saw their stock prices gain 4.8% and 4.9%, respectively.
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