Oil Prices Jump on Threat from Iran

Crude oil prices are rising sharply today following reports that Iran is preparing for naval maneuvers near the Strait of Hormuz, the 34-mile wide chokepoint leading to the Persian Gulf. WTI crude is currently trading at $100.23/barrel, up nearly 2.5%, and Brent crude is trading at $109.61, up 2.4%.

Bloomberg reports that there was even a threat that the strait would be closed, although a spokesman for the Iranian government has said that such comments were made by an official who does not have an official title. The original statement, however, is quoted by the Iranian Student News Agency and attributed to a member of the Iranian parliament:

We will hold an exercise to close the Strait of Hormuz in the near future. If the world wants to make the region insecure, then we will make the world insecure.

The maneuvers and the tough talk follow the European Union’s addition of 180 Iranian individuals and companies to a blacklist in an effort to get Iran to stop development of its nuclear program. The US had previously made a similar move.

About one-sixth of the world’s oil supply  travels through the Strait of Hormuz every day, including Iran’s production of about 4.25 million barrels/day. Any threat to the flow of oil through the strait is sure to send a signal of supply disruption to oil traders.

Although the immediate threat appears to be phony, Iran has not hesitated in the recent past to use its oil supplies as a geopolitical weapon. Whether those actions were successful or not probably depends on one’s point of view.

What’s not arguable is that any real threat to the Strait of Hormuz would almost certainly provoke a US response, probably in the form of some kind of naval exercise in the Gulf of Oman. A more aggressive response is also not out of the question.

Iran is unlikely to provoke such an encounter, but that does not calm the fears of oil traders. The mere possibility of a confrontation at the Strait could send prices much higher especially if the threat is not resolved quickly. Iran does not need to start shooting in order to make its point to the world.

Paul Ausick