If Iran were to shut down the Strait of Hormuz, a key oil transportation route where millions of barrels travel out of the Persian Gulf every day, Brent crude would surge to between $150 and $200 a barrel, according to an oil analyst with Societe Generale.“We believe it would be relatively easy for Iran to shut down the Straits of Hormuz,” wrote Michael Wittner, in a report late Friday to clients. “A credible threat from missiles, mines, or fast attack boats is all it would take for tanker insurers to stop coverage, which would halt tanker traffic. However, we believe that Iran would not be able to keep the Straits shut for longer than two weeks, due to a US-led military response.”
However, the analyst puts this aggressive action as a low probability event. The more likely scenario is an embargo imposed by the European Union, accompanied by U.S. pressure on other countries to do the same, which could still send Brent prices to the $125 to $150 range. Brent was trading above $112 a barrel on Monday.
“AnEU embargo is considered likely, especially after the EU reached an agreement in principle on an embargo on January 4th,” wrote the analyst. “When it is announced, depending on the timing and details, we may revise our base case oil price forecast upward.”
More than 15 million barrels a day flow through the strait, making it one of the most (if not THE most) important points for oil delivery in the world. Its North coast is made up of Iran, which recently announced that it has started uranium enrichment at one of its Nuclear plants, further inviting sanctions by Western nations.
Traders see the European embargo and the way Iran responds to it as keeping a bottom under oil prices for much of 2012.
“At no point during the year would I suggest going home short crude,” said David Greenberg, president of Greenberg Capital and former member of the NYMEX board. “We could easily open $25 higher on the Brent market” following a drastic move by Iran.
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