The S&P/ASX SMALL ORDINARIES (Index:^AXSO) (ASX:XSO) index is poised to open on a back-foot due to negative offshore leads, but one group could prove to be the exception and that's thanks to a jump in the oil price over the weekend.
The Brent crude benchmark rallied as much as 1.4% while the West Texas Intermediate (WTI) followed with a 1% gain on news that a UK-flagged oil tanker was seized by the Iranian Revolutionary Guard along with another Liberian ship, according to Bloomberg.
The escalating tension in the Straits of Hormuz may be destabilising to regional peace but it's good news for ASX energy stocks like the Woodside Petroleum Limited (ASX: WPL) share price, Oil Search Limited (ASX: OSH) share price and Santos Ltd (ASX: STO).
Regional conflict good for oil
The UK Foreign Secretary Jeremy Hunt expressed concern by the latest development as Iran steps up its campaign to disrupt the major supply route.
The seizure of the vessels follows on from a string of military actions taken by the Iranian regime, including US and Iran shooting down each other's' drones, the attack on two tankers that set them ablaze on June 13 in which Iran denied any involvement, and the harassment of a BP tanker that had to be rescued by a UK navy frigate.
The good news is that no one has been killed by the heighten tension in the straits, although the risk of this is growing. Any fatality is likely to trigger an upscaling in military action that will prompt a surge in the oil price.
Oil bears not giving up
However, geo-political tension is about the only thing stopping the oil price from slumping in the near-term.
Robust global supply of oil thanks to the US shale revolution has been met by weakening demand for the commodity due to a slowdown in global economic activity from the US-China trade war.
The International Energy Agency (IEA) cut its 2019 oil demand forecast just last week to 1.1 million barrels per day (bpd) from its initial estimate of 1.5 million bpd.
The Brent price is more impacted by global drivers than the WTI as the latter is a better barometer of what's happening inside the US, which is a net exporter of oil thanks to the development of its shale industry.
On the flipside, US shale may not be everything its been made out to be. Shale oil is expensive to produce and the wells dry up much more quickly than conventional sources of crude. There are signs that investors are already pulling back from the industry and this could mean US shale has peaked (or is close to it).
