With regard to the current situation in the Middle East, there are two major risks that we could see if things continue to get worse, first, the Middle East risks entering a dangerous geopolitical environment of an arms race.
Olli Heinonen, a former deputy head of the international atomic energy agency (IAEA), told reporters a few days ago that Iran may need only six to eight months to build an atomic bomb, Iran’s production of enriched uranium has been curbed in recent years under the Iran nuclear deal, but it has not stopped working on nuclear power plants, reactors and other facilities. Therefore, if Iran breaks the upper limit of enriched uranium stipulated in the nuclear agreement, it may mean that Iran withdraw from the nuclear agreement completely.
Then the relevant countries, such as Saudi Arabia, may follow, creating a local arms race. That means not only tensions between the United States and Iran, but also the risk of a new round of geopolitical instability in the Middle East. In financial markets, crude oil will be the single commodity most affected, apart from panic and boosting demand for safe assets.
We know that Iran has repeatedly threatened to close the Strait of Hormuz since the U.S. sanctions. And the reason why each such comment, as well as the recent tanker attack in May, has sent oil prices soaring in a short time is because:
The Strait of Hormuz connects the Persian Gulf with the Gulf of Oman, located between Iran and Oman, about 50 kilometers wide and under 60 meters deep, it’s been at the center of tension in the Persian Gulf for decades. About 20 to 30 percent of the world’s crude oil is exported to the rest of the world via the Persian Gulf and the Gulf of Oman. So the safety of shipping lanes is a matter of oil prices and the global economy. And if Iran ever closes the Strait of Hormuz, what does that mean? Iran had warned that this would mean a rapid climb back above $100 a barrel.
Ernest Moniz CEO, ENERGY FUTURES INITIATIVE If there is a major disruption like tying up the straits of Hormuz, well then we would see a very very higher price spike which would almost certainly have very very significant economic impact throughout the world, including the U.S. Oil in the past has gone well above 100 dollars in recent memory and i think we would be talking about those kinds of price excursion in a major disruption.
Most of the oil analysts on CNBC said that if Iran’s nuclear relationship worsens, a spike in oil prices is a sure thing, but prices above $100 a barrel may not last a long time.
International Brent crude is trading above $60 a barrel, down more than 16 percent in a year
U.S. WTI light crude futures traded below $52, down more than 19 percent for the year.
But is there any turning point? Analysts say one area that may be on the agenda next is pushing INSTEX, a trade support tool for legitimate trade between Europe and Iran, which is intended to circumvent U.S. sanctions. More recently, Iran has also blamed the EU for the slow progress. So if INSTEX goes online, that could ease the situation. But if the tool does not have a chance of working, it could be the final straw for Iran to withdraw from the nuclear deal. We will keep an eye on this issue.