Strait At You
Oil prices rallied as Iran made threats and US oil supplies are likely near a three year low. What a way to get ready to end a year that has already seen incredible turmoil. Iran of course is in pursuit of a nuclear weapon and they really believe that no one would have the guts to try and stop them. Sad part is they are probably right until they made one tactical error. The Iranians are becoming more embolden to the world’s lack of conviction and took exception to the fact that the UK would dare put strong sanctions on their banks while the US and the rest of Europe hung to the rear so they decided to storm the UK embassy. That of course was the last straw for Europe. I guess it is ok to thumb your nose at the world, threaten to annihilate your neighbor and develop a dangerous weapon that could create an arms race that could lead to Armageddon, but whatever you do don't threaten the sanctity of a foreign European embassy. That move solidified Europe who you can tell from their most recent dealings with the financial crisis, finds it hard to agree on anything let alone sanctions on oil which is desperately needed in Europe at this time of year. More than likely we will see an oil embargo on Iranian oil at the end of the year which will give time for the Europeans to make other arrangements or at least drag their feet for the rest of the high demand winter season. Besides, a spike in price that was premature may hurt their already tenuous economies.
Iran, realizing that sanctions are coming, wants to make as much revenue as they can before the boom in lowered. What better way to juice your profits by threatening to shut down the Strait of Hormuz. Iranian Vice President Mohammad Reza Rahimi said that if Europe dares to impose oil sanctions that Iran will block oil transportation through the Strait of Hormuz. If they can't sell their oil then I guess they are saying that no one gets any. The reason this moves the market is because the strait is the world's most important choke point according to the Energy Information Agency. The Strait of Hormuz, which is located between Oman and Iran, connects the Persian Gulf with the Gulf of Oman and the Arabian Sea and according to EIA data, saw about 15.5 million barrels of oil a day flow through there in 2009, down from a peak of 17 million bbl/d in 2008. Flows through the Strait in 2009 are roughly 33 percent of all seaborne traded oil (40 percent in 2008), or 17 percent of oil traded worldwide.
Any observer realizes that any attempt by Iran to shut down the straits would be an act of war against the world and would be met with swift military reprisals. In fact it would be like Iran saying to the world, "please annihilate me." Of course why bother to do that if just threatening to do that could put more money in your pocket?
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at firstname.lastname@example.org.