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Tensions With Iran Lift Oil Prices, Europe’s Recession Fears

Oil heads over $100, and Merkel meets with Sarkozy and Monti


One third of the world’s oil tankers (14 supertankers per day) pass through the Straits of Hormuz. The USS John C. Stennis also passed through the Strait of Hormuz in November. Next, the U.S. may send the USS Eisenhower to the region to give Iran an even stronger message that the U.S. intends to keep oil pipelines open. In response, Iran continues to issue threats to the U.S. Navy. Last Tuesday, Iranian Major General Salehi reportedly said that “Iran advises, recommends and warns [the U.S.] not to move its carrier back to the previous area in the Gulf.” This warning pushed oil up to an 8-month high of over $100 a barrel.

To ease these tensions, the U.S. Navy rescued 13 Iranian fishermen who were being held hostage by Somali pirates, returning those Iranians to their home country. This won some support in Iran for the U.S., but Iran’s hard-line Fars news agency called the rescue a “Hollywood-style propaganda stunt” to justify the U.S. Navy’s “blockade.”

On Tuesday, the European Union reached a preliminary agreement to ban Iranian crude oil, but it must secure new sources before the embargo can proceed. This dilemma could push Europe into recession by making energy scarce and pushing prices to prohibitive heights. The euro is already at a 15-month low to the U.S. dollar due to continuing financial concerns about the eurozone. On Friday, the European Central Bank had to step in to buy Italian and Spanish debt after 10-year Italian bond yields rose to 7.12% (i.e., 5.24% higher than the 1.88% Germany pays on its 10-year bonds). Italy now pays 4.94% on its two-year notes, 4.76% higher than equivalent German notes. Clearly, the euro crisis is not over.

Even Germany is hurting. On Thursday, its federal statistics office announced that retail sales fell 0.9% in November. That tells us that Europe is on the brink of a recession as we enter 2012. I should add, however, that China’s official Purchasing Managers Index rose to 50.3 in December — up from 49 in November. This further confirms that the eurozone’s woes will not derail China’s economy.

The euro rose after Germany’s Angela Merkel met with France’s Nikolas Sarkozy on Monday to discuss budget rules for the eurozone. This is just one of two important international meetings for Merkel. We’ll know a lot more about the state of Europe after she meets with Italian Prime Minister Mario Monti on Wednesday. Then comes the start of the World Economic Forum in Davos, Switzerland, and U.S. Treasury Secretary Tim Geithner’s visits to China and Japan. This week, I’ll also watch bond auctions in Europe and America, but I suspect that all eyes in the U.S. will be glued on the outcome of the New Hampshire primary.

Article printed from InvestorPlace Media, http://investorplace.com/investorpolitics/tensions-iran-oil-prices-europe-recession-fears-eurozone/.

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