Oil prices surged nearly $4 per barrel on Tuesday morning on concerns about supply disruption ensuing from a possible confrontation between the U.S. and Iran. Front month WTI crude prices reached a intraday high of nearly $103 a barrel. Technically, February WTI crude futures need to breakout past the most recent high of $103.37 for a drive to $104 and higher.
Brent crude oil prices remain in an upswing as well, hitting a session high of $111.58 per barrel, and a close above $109.59 signals an emerging bull run advance, according to technicians. For Brent crude, the next key level to watch is $112.70, the 200-day moving average.
Traders say Iran is the new Libya. Just as civil war in Libya caused crude oil prices to spike to near $115 a barrel in 2011, escalating tensions between the Iran and the West could cause oil prices to reach those levels again early this year. Iran is the world's fourth largest oil producer, with production at 4.245 million barrels daily in 2010, according to the 2011 BP Statistical Review.
Earlier on Tuesday, Iran's army chief warned the U.S. Navy not to return an aircraft carrier back to the Persian Gulf after it was removed due to Iran's naval exercises in the area. Iran's threat comes after it test fired missiles in the Strait of Hormuz over the weekend and the U.S. formalized extending sanctions on any entity dealing with the Iranian Central Bank. The euro-zone nations should decide by the end of the month whether to place an embargo on Iranian oil imports.
"Some of the rhetoric can at times be part of a PR show but it can quickly spin out of control," said Petromatrix energy analyst Olivier Jakob. "Iran asking a departing U.S. aircraft carrier not to return is almost forcing the US Navy to send it back to the Persian Gulf."
Iran has said it could shut the Strait of Hormuz, a major waterway that the EIA calls "the world's most important oil chokepoint due to its daily oil flow of almost 17 million barrels in 2011."
Iran's currency is already feeling the pinch of a possible oil ban — with the rial falling 40 percent vs. the dollar in the past month.
"In this environment of increasing tensions and rhetoric, global asset managers are unlikely to give up their long exposure to oil ... at least until we can have a clearer idea as to what the Eurozone decides on an Iranian import ban and the Iranian reaction to the Eurozone decision," Jakob said.
He recommended buying the very back of the curve in Brent crude oil, buying December 2016 Brent at $90 in the current Iranian geopolitical environment.
Some traders said they're hedging Iranian risk to oil prices by buying "out of the money" calls. Call options from $110 to $130 have been trading, said Paramount Options president Ray Carbone, on concerns about Iran as well as possible strikes in Nigeria.