“Not one drop of oil” will get through the Strait of Hormuz if Iran decides to close it, said Iran’s vice-president Mohammad Reza Rahimi last week. Seventeen million of the 87 million barrels of oil the world uses every day are shipped through the Strait.
Growing tension between Iran and the West over Iran’s nuclear programme, which some fear could lead to war, is rattling the market. The prospect of a drastic oil-supply squeeze if the Strait closes sent oil prices up by almost 5% to $114 a barrel last week. Analysts reckon that, if the Strait closes, oil could spike up to more than $200 a barrel.
Closure of the Strait seems unlikely, says Garry White in The Daily Telegraph: “Iran would take a severe economic hit…as it would not be able to export its own oil or import vital materials”. On the other hand, sanity doesn’t always prevail in these situations and, with Iranian elections due in early March, anti-West rhetoric and hence global tension is likely to rise further. Assuming the Strait stays open, however, the key question now is what impact new sanctions on Iran will have: the EU is set to ban Iranian oil imports.
Rather than taking Iranian oil off the market altogether, this will narrow the range of potential buyers, prompting Iran to offer discounts, says Liam Denning in The Wall Street Journal. Europeans will look to Saudi Arabia to raise output to compensate for missing Iranian oil, while China would take the Iranian oil Europe won’t buy, reckons Jeffrey Currie of Goldman Sachs. The net effect, then, could well be a supply increase.
Other factors also point to lower prices. European peripherals Greece, Spain and Italy jointly take 14% of Iranian exports and will now face higher prices as the range of suppliers dwindles. The weak euro is making oil more expensive for the eurozone in any case.
Globally, an oil price of $120 would imply that energy costs were consuming 9% of GDP, on a par with previous recession-inducing spikes, says Citigroup. The upshot? Geopolitics have obscured the poor macroeconomic backdrop and market fundamentals for oil, as Rick Mueller of ESAI Energy, a research firm, points out. If and when the Iran situation calms down, “prices will fall a great deal”.