Phil Flynn: Forget those Fed Fund Futures, Oil is the key!

. “It does have the ability to restrict access to the Straits of Hormuz with its naval forces temporarily and threaten U.S. forces with missiles,” U.S. Army Lieutenant General Ronald Burgess, director of the Defense Intelligence Agency, told the Senate Armed Services Committee. Iran has taken steps to strengthen its military defenses and cultivate allied terrorist groups targeting the U.S. and Israel, Burgess told the committee. “Iran can conduct limited offensive operations with its strategic ballistic missile program and naval forces,” Burgess said.

Iran has threatened to block the Straits of Hormuz before. The EIA says that narrow Straits of Hormuz between Iran and Oman (21 miles width at its widest point) is the most important choke point for oil shipments from the Persian Gulf. Roughly 17 million barrels per day, more than 20% of the world’s total oil supply, transit this route. If the Straits of Hormuz were blocked, only a small share of the oil could be transported along alternative routes. The most viable is a 745-mile long east-west pipeline through Saudi Arabia to the Red Sea. The possibility that Iran might try to close these straits would cause the mother of all oil spikes but at the same time it would also be the end of the Iranian regime as we know it. The global outrage from such a move would be met with swift and lethal resistance.

Oil also got a boost yesterday on the EIA which showed a surprisingly large crude draw on the East Coast. I suspect that that number will be adjusted somewhat next week to the upside but that does not help us this week. The EIA said that crude oil inventories decreased by 2.2 million barrels from the previous week. At 354.0 million barrels, U.S. crude oil inventories are above the upper limit of the average range for this time of year. Total motor gasoline inventories decreased by 1.1 million barrels last week, and are above the upper limit of the average range.

Phil Flynn can be reached at pflynn@pfgbest.com. And make sure to watch him every day on the Fox Business Network!

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