Iran Pushing Oil Prices Higher

It's been deja vu lately for the oil market as fear factors regarding Iran have returned.

Iran is very important to global oil markets as it is the world's third biggest exporter of black gold after Saudi Arabia and Russia. Last year, the country sold an average of 2.6 million barrels of oil a day, mainly to the Asian countries of Japan, China and India.

The price of Brent crude oil, the global benchmark, has rallied to almost $115 a barrel as tensions rise in the nuclear triangle between Iran, Israel and the United States.

Of course, there are factors at play here besides Iran which is pushing prices higher. These other factors include continued supply disruptions from Libya, Yemen and Syria along with sharply lower oil inventories in Europe (the lowest level in almost 9 years).

This combination of tight fundamentals and rising geopolitical tension has driven up oil prices more than 16 percent from the eight-month low set in early October at $99.70 for Brent crude oil.

The geopolitical tension comes from the fact that Iran controls the Strait of Hormuz, the gateway for Middle East oil where 15.5 million barrels a day passes through. That is equivalent to a third of all seaborne traded oil.

The Strait has added significance because all the world's spare production capacity is in Saudi Arabia, the United Arab Emirates and Kuwait. All of these countries ship their oil through the Strait.

If the Strait of Hormuz is shut down, even briefly, oil prices would skyrocket. Independent energy consultant Philip Verleger says “It is the $200-a-barrel scenario.”

Investors can protect themselves several ways against such a scenario such as buying companies with large exposure to oil from other regions of the globe. Statoil ADR (NYSE: STO) and Petrobras ADR (NYSE: PBR) come to mind.

Another way to play it is through an exchange traded fund (ETF) based on the Brent oil futures contract. It is the United States Brent Oil Fund (NYSE: BNO) and is up 25% year-to-date.