Analysts Discount Iranian Threat of $100 Per Barrel Oil

July 8, 2018 Updated: June 15, 2019

News Analysis

Iranian threats to push the price of oil above $100, perhaps by blocking the Strait of Hormuz, are not credible, according to industry analysts.

Iranian President Hassan Rouhani raised the stakes in the ongoing tensions between the United States and Iran when he implied on July 3 that Iran might block the Strait of Hormuz to curb oil exports from its neighboring countries in retaliation for U.S. policies toward Iran.

The Trump administration has pulled out of the Iranian nuclear deal and is reimposing sanctions on Iran. It is also pressuring other countries to pull out of investments in the country.

In response to Rouhani’s threat, Cpt. Bill Urban, a spokesman for the U.S. military’s Central Command, told The Associated Press on July 4 that the U.S. Marines and its allies in the region “stand ready to ensure the freedom of navigation and the free flow of commerce wherever international law allows.”

On July 5, Iran’s OPEC Governor Hossein Kazempour told Reuters that oil prices could soon rocket to $100 per barrel.

In spite of Iran’s threats, industry experts do not expect $100 a barrel oil.

Hillard Huntington, executive director of Stanford University’s Energy Modeling Forum, said that Iran most likely would not try to close the strait.

“If they did and could partially upset oil flows, Saudi has some capacity but not complete capacity to offset the losses,” Huntington said. “I could see a situation where the Brent oil price (now about $77 per barrel) could spike above $90 for a while. That is not what I would expect, but it could be possible.”

A Potential ‘Military Suicide’

Phil Flynn, a senior market analyst with the PRICE Futures Group, said, “It’s probably not a good plan of action for Iran, because if they do that, they are going to break international laws and it will be game on.”

Flynn said, paraphrasing the U.S. secretary of defense, “The U.S. Navy will act very aggressively in keeping the strait open in international waters.”

“The market has been pricing in the possibility of severely reducing imports from Iran,” Flynn said. “We are getting the sense that Saudi Arabia and Russia are going to make up for some of that. But it definitely does reduce the global spare production capacity and that could cause a spike up in price if things fall apart at any time.”

But Flynn discounted the possibility that Iran would carry out the threat of blocking the strait.

“It would almost be asking for a war in Asia,” Flynn said. “It will be a military suicide for Iran. If Iran wants to show how strong they are by doing so, any military person would tell you that would not be a right course of action.”

Missed Opportunity

Flynn also believed that while Iran has blamed U.S. pressure, the real pressure is coming from inside Iran.

“The Iranians are upset. Look at their economy,” Flynn said, “[Iran] has really squandered what should be a good time for their economy since the oil price has recovered quite dramatically. But instead of taking advantage of that to improve their economy, they’ve chosen to fight wars in Yemen and Libya. And it hurts their own economy.

“It isn’t only the pressure coming from the United States that the Iranian regime should worry about. It is the pressure coming from the people that are upset and wondering why they are fighting wars at a time when they are struggling with their economy, that should be flourishing.”

Flynn said the mismanagement of the economy has triggered a revolt. “It hasn’t provided a lot of hope for the Iranian people. They are having their own version of Arab Spring right now. The only reason it has not blown up to a full-fledged revolt is that the Iranian government has used violence against its own people to squash any revolt. So, it’s a very difficult time.”

“The Iranian government has to be very careful. They have lost the support of people at home,” Flynn said.  “I think the Iranian people are interested in a better economy and not fighting everybody’s wars. That’s why we see the uprising in Iran.”

In terms of the escalated tension between Iran and the United States after President Trump withdrew from Iran’s Nuclear Deal, Flynn said he thought “it is the right decision to withdraw from the nuclear deal, and it is the time to put the pressure back on them [the Iranian regime]. Absolutely.”