Crude Jumps On False Iran Rumor, But Holds Onto Gains

NEW YORK (Dow Jones Newswires), Dec. 13, 2011

Crude-oil futures leapt more than three percent in just minutes Tuesday on a market rumor that Iran closed a major oil-shipping channel, but then pared gains as the rumor proved untrue.

According to the rumor, the Iranian government closed the Strait of Hormuz. The strait, located between Iran and Oman, is the most important oil-shipping channel in the world, handling about 33% of all ocean-borne traded oil, according to the U.S. Energy Information Administration.

The rumor was picked up on financial blogs and a handful of news web sites, and sent Nymex crude futures rocketing as high as 3.6% over Monday's settlement, to $101.25 a barrel.

An Iranian official later dismissed the rumor, and a spokeswoman for the U.S. Navy's 5th fleet in Bahrain said shipping traffic in the strait was flowing normally. The rumor appeared to be founded on a news item from Monday afternoon, in which a member of the Iranian parliament said its military was preparing to practice closing the straight.

Traders and analysts attributed to the rapid rally to preprogrammed electronic trading, set to liquidate bets on a market decline as soon as prices began to gain substantially. So-called short positions are covered by the purchase of contracts, which generated the buying spree.

"Rumors have a way of spreading around, and in this age of electronic markets, when you get something that starts to push prices up quickly, it triggers the stops and you get these explosions in prices," said Tom Bentz, director of BNP Paribas Prime Brokerage.

The market drifted downward after that but still held onto gains, as traders who ditched bets on falling prices were slow to return. Crude futures for January delivery ultimately settled up $2.37, or 2.4%, at $100.14 a barrel on the New York Mercantile Exchange. Brent crude oil on the ICE futures exchange was $2.42 higher at $109.68 a barrel.

Indeed, the sustained high price reflects continued market jitters over geopolitical tensions between Iran and the West, which emerged last month after the U.S. ordered sanctions against Iran over what it claimed are Iran's nuclear-weapon ambitions. Earlier this month, Iran announced it seized a U.S. surveillance drone.

Iran is the world's third-largest supplier of crude, exporting 2.2 million barrels per day. Although it doesn't supply oil directly to the U.S., fears are that if its barrels are removed from the global portfolio it would pinch remaining available supply.

"The market's going to run on anything like that," said Tony Rosado, a broker with GA Global Markets. "The market's sensitive and vulnerable."

A passel of other news, both bullish and bearish for crude, sluiced through the market. A portion of the Houston ship channel was closed Tuesday morning after two ships collided, and there was speculation that the Fed may announce another round of economic stimulus. Meanwhile, the Organization of Petroleum Exporting Countries and the International Energy Agency both reduced forecasts for 2012 crude-oil demand, citing the potential for global economic decline, and U.S. November retail sales grew less than expected, signaling a weak start to the holiday shopping season.

Front-month January reformulated gasoline blendstock, or RBOB, ended the day 6.18 cents, or 2.4%, higher at $2.6254 a gallon. January heating oil settled 3.27 cents higher at $2.9288 a gallon.

Copyright (c) 2011 Dow Jones & Company, Inc.