Developments this week
The New Year started with a literal “bang” as Iran test-fired anti-ship cruise missiles and warned the US Navy not to bring aircraft carriers into the Persian Gulf. These developments sent Brent crude surging upwards from $107 a barrel to $112 on Tuesday, the first trading day of the New Year. On Wednesday, the EU Foreign Ministers announced that they will be taking further decisions on harsher sanctions against Tehran on January 30th, probably including an EU embargo on Iranian oil. This news sent Brent crude up another $1.57 to close Wednesday at $113.70. New York crude which felt downward pressure from the falling euro closed at $103.22, the highest settlement since May.

Pressure from the new economic sanctions on Iran are clearly behind the bellicose threats being made by senior Iranian officials who are clearly fear that the situation will only get worse. Tehran is taking the line that any embargo of their oil will send world prices up to $200 a barrel, but that the government is not worried because China will buy any oil that EU embargoes.

The US and EU continue to say that they can manage the sanctions well enough to slowly bring unbearable economic pressure on Tehran while still keeping oil prices low enough to avoid a global recession. Much of the rhetoric coming from Tehran is for domestic consumption as Iran’s economy deteriorates under the sanctions and elections are approaching. Most observers agree that the Iranians have more sense than to let the situation spiral down into open hostilities with the US and EU in which case Iran would be the clear loser. However, as the rhetoric becomes more heated and as factions in Iran’s government jockey for influence there is much room for miscalculation. Elsewhere in the Middle East, the Syrian situation continues to deteriorate; Libyan oil production and exports are increasing faster than many thought possible, and incidents of factional fighting have been reported in Tripoli.

The EU debt crisis is moving back into focus with the euro falling to a ten-year low against the yen, overnight deposits with the ECB setting new all-time highs, and numerous indicators pointing to a recession of unknown depth ahead. In contrast to the EU, some traders think they see a bright spot in some of the recent US and Chinese economic data which has contributed to the price rise this week.

In the US the API reported Wednesday afternoon that crude inventories declined by 4.4 million barrels last week, but that gasoline stocks rose by 3.4 million barrels and distillates rose by 5.2 million. The EIA stocks report will be issued on Thursday due to the holiday on Monday.

NY gasoline futures have been climbing smartly of late. After trading below $2.50 a gallon in mid-December, prices have climbed nearly 30 cents a gallon to close at $2.78 on Wednesday. Natural gas futures however are struggling to stay just above $3 per million as the mild weather is forecast to continue across much of the country and natural gas inventories continue to build.