International Non-Incident Causes Jump in Oil Prices

A Falcon Business Jet, the same model forced to land by the Iranian Air force Tuesday, shown here in a file photo. Photo: CNN.com

An inaccurate news report of an alleged international incident between Iran and the United States caused a sizable jump in crude oil prices this morning.  The state-run Iranian news agency Fars reported around 9:30 am eastern time that the Iranian Air Force had forced a US military aircraft en route to Afghanistan to land inside Iran.  As the news made its way to the trading floor, the possibility of an international standoff between the US and Iran, a major crude exporter and member of OPEC, sparked an increased interest in crude.  The reactive buying event made for a surge in the NYMEX price, which spiked at $93.02 a barrel around 10:00 am eastern time.

Within a few minutes of the initial report, however, the Fars agency’s claim was disputed by the US military and several other news agencies.  Fars quickly withdrew its report, and confirmed that the aircraft that was forced to land due to its violation of Iranian air space was not a military aircraft and in fact had no US citizens on board.  Subsequent reports by Bloomberg.com, Reuters UK, The New York Times, and other world press organizations explained that the plane had been of Hungarian origin and had slipped into Iranian airspace by accident.  After being questioned by Iranian officials, the Hungarian passengers were allowed to return to the aircraft, which was then permitted to continue on to Afghanistan.

This international misunderstanding is a perfect example of how political events can affect the market price of oil.  Had the report of the Iranian military detaining American military personnel been true, it very well may have resulted in Iran cutting off oil exports to the US, which would have led to a substantial supply decrease and corresponding price increase.  As this scenario played out the imaginations of oil futures traders, they bought crude aggressively, hoping to capitalize on its future increase in value, and in doing so drove up the market price.  Once the Fars report was discredited, the buying slowed, and crude returned to the price it had been at (about $91) before the “incident” was first reported.  As could be expected, the NYMEX price of heating oil mirrored crude’s price jump–peaking at $2.56 per gallon at about the same time.