Like a spectre from the past, Iran has returned to haunt crude oil markets.
 
The prospect of the Islamic Republic having its own atomic bomb has raised the possibility of conflict in the Middle East, pushing Nymex futures steadily back towards $100 per barrel. Back in the 1980s, when Iraq seemed on the point of joining the nuclear club, Israel launched ‘Operation Babylon’, destroying Saddam Hussein’s own bomb project. However, if they attempt a repeat performance, Iran could retaliate by closing the Straits of Hormuz, which is the gateway for Middle Eastern oil. The fear of war in the region means that oil has not suffered falls of the extent seen in most other risky assets such as indices, which have been badly affected by the blow-up in Italy, where bond yields have crossed the 7% rubicon, pushing the country into bailout territory.
 
In addition, other factors are pushing up prices. European supply levels have fallen to their lowest level in almost nine years, according to the International Energy Agency, as the combined effect of reduced Libyan output, production stoppages in the North Sea, attacks on pipelines in Nigeria and a redirection of Russian crude oil flows to Asia took its toll. A closure of the Straits of Hormuz, through which a third of all seaborne oil passes, is the nightmare scenario, and could provoke a price rally similar to that seen in 1990 when Iraq invaded Kuwait, precipitating the first Gulf War. However, for now it seems that Israel is staying its hand, which could prompt attention to refocus on the Italian debt crisis and its wider implications for global growth. The eurozone appears to be teetering on the brink of recession, with a consequent reduction in demand for oil, which might act as a break on prices in the short term.