Oil markets are nervous animals nowadays. Given the tensions between Iran and the U.K. since late March over Tehran's seizure of 15 British sailors, the prospect of diplomatic efforts failing to solve the stand-off haunted the market. That's raised fears of a military confrontation in the Persian Gulf. After Iran pardoned and freed the 15 sailors, the market was so relieved that oil prices dropped by over $2.
Energy traders believe a 'fear premium' is building once again in the price of crude oil to account for a greater perceived risk to energy supplies. Diplomatic analysts and political scientists don't make the best oil traders ... and vice versa. But armchair political analysts are what oil traders have become of late, trying to map out the latest twists and turns of a diplomatic chess game, weighing up the possibility of one thing -- do the developments take us any closer or any further away from supply disruption.
Over the course of the crew's seizure, the markets played out a number of worse case scenarios, most dramatically, a naval blockade of the Straits of Hormuz – where a quarter of the world's oil flows through – or a repeat of the 'Tanker Wars' of the 1980s when shipping was targeted.
Runaway Rumor Mill
Financial markets recently got a glimpse of just how sensitive oil traders were to rumors of military action involving Iran. Towards the end of March the rumor mill hit top-gear.