NEW YORK ( TheStreet) -- Oil futures finished sharply higher Tuesday as traders priced in an Iranian geopolitical risk premium.
West Texas Intermediate (WTI) light sweet crude oil for January delivery settled at $100.14 a barrel, up $2.37, and February Brent futures were up $1.89 to $108.97, despite a stronger dollar and pullback of equities in afternoon trading. Oil typically trades inversely to the U.S. dollar and complementary to the S&P 500.
"You would expect prices to the move other way -- so that's atypical," said Jacob Correll, an energy analyst at Schneider Electric's Summit Energy.
WTI futures had spiked to $101.25 at around 9:51 am.
"The increase came so fast," said Correll.
The trigger to the big spike was attributed to a raft of algorithmic trades set off by rumors that Iran was closing down the Strait of Hormuz, where about one-third of the world's seaborne oil traffic takes place -- for war games. There were also reports of a ship collision in the Houston ship channel -- another important oil conduit -- which sparked concerns about traffic congestion.
"The whole move happened within 15 minutes," says Tradition Energy's senior market research director Addison Armstrong. "There was a large volume spike. [But then] people quickly realized the Strait of Hormuz was not being shut down and [prices] traded right back down."
Iran's Foreign Ministry later confirmed that the Strait remained open, allowing prices to ease for a couple of hours before closing above $100.
The most important takeaway from Tuesday's spike, says Armstrong, is that "there's clearly an Iran premium that's being priced into the market, and one which is subject to a great deal of fast money flowing in, should there be an event."
Schneider Electric's Correll agrees that the Strait of Hormuz rumors gave the markets a taste of the violent action that could actually occur if Iran were to have a confrontation with its enemies.
Last week, European Union leaders threatened to impose sanctions on Iranian oil imports as a show of force against a buildup of Iran's nuclear program. While Iran isn't a major global oil supplier, analysts said the sanctions would likely force prices higher, due to the country's ability to interfere with oil tanker movements along the Strait of Hormuz.
Throughout the day, crude prices were also being buoyed by a report from the ZEW Center for European Economic Research of an improvement in German investor confidence for the first time in 10 months, a stronger than expected Spanish debt sale and rumors of further fiscal stimulus ahead of the Federal Open Market Committee announcement in early afternoon.
A stronger dollar had sliced into oil prices Monday, leading to a weaker close, as confidence in Europe's debt-crisis plans waned.
Oil stocks mostly settled lower Tuesday.
(HES - Get Report)
inched down 0.1% to $56.27;
(APA - Get Report)
lost 1.7% to $92.33;
(APC - Get Report)
fell 1.7% to $76.49;
(BP - Get Report)
lost 0.5% to $41.63;
fell 0.7% to $185.38;
(PZE - Get Report)
surrendered 2% to $12.46; and
(MRO - Get Report)
rose 1.2% to $27.64.
-- Written by Andrea Tse in New York.
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