Energy

Could Iran close the Strait of Hormuz? Energy analysts skeptical of Tehran's latest threat

Key Points
  • President Donald Trump's administration announced Monday that buyers of Iranian oil must stop purchases by May 1 or face sanctions.
  • In response, Iran's semi-official Fars News Agency quoted Revolutionary Guards General Alireza Tengseiri as saying that if Tehran was barred from using the Strait of Hormuz, they would "shut it down."
Foreign tourists in veils seen on a passenger boat with the Iranian flag amass in the waters of the Strait of Hormuz on May 2, 2017 near Hormuz Island, Iran. An oil tanker is seen on the move in the background.
Kaveh Kazemi | Getty Images

Iran has reportedly renewed its threat to close the Strait of Hormuz, the world's busiest transit lane for seaborne oil shipments, prompting fears about the potential ramifications for oil prices and broader financial markets.

President Donald Trump's administration announced Monday that buyers of Iranian oil must stop purchases by May 1 or face sanctions.

The move, which took many market participants by surprise, ends six months of waivers which had allowed Iran's eight biggest buyers of crude to continue to import limited volumes.

In response, Iran's semi-official Fars News Agency quoted Revolutionary Guards General Alireza Tengseiri as saying that if Tehran was barred from using the Strait of Hormuz, they would "shut it down."

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Analysts at Barclays said in a research note published Monday that approximately 20% of all the sea-borne crude and condensates passes through the Strait of Hormuz.

"The short-term upside risk to prices is based on a) our view that Saudi Arabia's response will likely be lower and slower compared to late last year and b) heightened risks of the closure of the Strait of Hormuz as a result of this action," analysts at Barclays said.

The bank added that the Trump administration's decision not to reissue waivers in May did not materially impact its view on longer-term prices.

International benchmark Brent crude traded at $74.17 Tuesday afternoon, up around 0.2%, while U.S. West Texas Intermediate (WTI) stood at $65.90, almost 0.6% higher.

Reflexive response

"This is the sort of stuff which does make me wonder if stock markets are being a bit too calm," Trevor Greetham, head of multi-asset at Royal London Asset Management, told CNBC's "Squawk Box Europe" on Tuesday.

"We are late in the business cycle, we are at a stage where U.S. interest rate rises are starting to take effect, the data is not necessarily strengthening everywhere you look, and this sort of geopolitical risk is just sort of adding an extra dimension," Greetham said.

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Iran has frequently claimed it would be prepared to close the Strait of Hormuz in recent years, prompting some energy analysts to dismiss the latest threat as nothing more than incendiary rhetoric.

"Iran's threat to close the Strait of Hormuz was a reflexive response that we do not take at face value," analysts at Eurasia Group said in a research note published Monday.

"But we have long warned about the Iranian cyber threat, especially the prospect that Tehran could take down Saudi oil infrastructure. The risk is higher because Riyadh is playing an integral role in enabling the Trump administration's harsher stance. The disruption of Saudi oil production could systematically rattle markets," they added.

Long standoff

On Monday, Trump said OPEC kingpin Saudi Arabia and other countries in the Middle East-dominated producer group could "more than make up" for any drop in Iranian oil supplies to global markets now that waivers were set to be removed.

In response, the oil-rich kingdom said it would work with other oil producers to provide ample supply and a balanced market.

"Many of the political demands the Trump administration has on Iran, which go well beyond the nuclear issue, are unlikely to be conceded by the Islamic Republic, meaning that a long standoff is on the cards," Peter Kiernan, lead energy analyst at the Economist Intelligence Unit, said in a research note published Tuesday.