Oil's River Card: Iranian Aggression

Source:

"Increased tensions with Iran rightfully support a bullish case for oil."

This morning, the river card was revealed in the way of an announcement from the Islamic Republic of Iran. According to a newswire article:

"The defence minister (Mohammad Mostafa Najjar) told me today that we launched a Sejil-2 missile, which is a two-stage missile and it has reached the intended target," Ahmadinejad said. "The missile was launched from here in Semnan," he added to cheers from the crowd.

"I was told that the missile is able to go beyond the atmosphere then come back and hit its target. It works on solid fuel," he added, without specifying the missile's range.

According to other reports, this was Iran's second test of the Sejil-2 missile, with the first test occurring approximately 8 months ago. This missile purportedly has the ability to reach targets 2,000 kilometers away with great accuracy. The walking distance from Jerusalem to Tehran is 1,559 kilometers and presumably the missile distance is as close.

Now we certainly do not want to be alarmists and this is a test comparable to the one the Iranians performed 8 months ago, so it's not an example of new technology. That said, the timing of the test is noteworthy in that it comes only two days after President Obama met with Israeli Prime Minister Netanyahu.

The immediate reaction to this missile test was that Italian foreign minister Franco Frattini cancelled a planned trip to Iran, primarily because Ahmadinejad wanted to meet in Semnan, instead of Tehran.

From an investment perspective, the idea of geo-political risk was reintroduced full force back into the price of oil today and oil is trading up ~2.5%, which of course is on the back of a ~35%+ move in the year-to-date, despite negative 'fundamentals.'

Iran is very relevant in terms of the global oil market. According to the most recent data, Iran ranks third in the world with ~136 billion barrels of total reserves (second, excluding Canada's non-traditional reserves), which is ~10% of the world's reserves. Iran is the world's fourth largest producer and OPEC's second largest, after Saudi Arabia.

Increased tensions with Iran rightfully support a bullish case for oil.

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