The interview, which I think you'll definitely want to watch below, highlights an important point that Kent has addressed numerous times regarding this ongoing period of increased volatility in crude prices.
That is: Geopolitical events are "the great outlier" in terms of influencing energy prices.
Simply put, Iran's unpredictability could have profound impacts on costs in either direction, depending on how the current battle between the producer and its European customers unfolds.
Tensions over Iran's nuclear enrichment program have spurred its European customers in Brussels to threaten boycotts of the Middle Eastern producer's crude. In response, Iran has threatened to shut down the Strait of Hormuz, a strategic waterway through which at least 18% of daily oil trade flows.
In a matter of hours of the strait being shut down, prices would increase anywhere from $25 to $30 a barrel (bbl). If the strait were shut down right now, after 72 hours, Kent foresees oil prices spiking to $150/bbl very quickly, and rising much faster from there. From there, prices could climb to $180. . .even $200/bbl.
But what is the likelihood of this scenario?
Well, that's the reason you need to watch the interview.
Political and Economic Costs Escalate
Political posturing has initiated a high-stakes game of chicken and a potential lose-lose situation for both Iran and Europe.
With a grim deterioration in domestic economic conditions in Iran, many experts believe the country would cave under Western pressures. Given its reliance on crude profits to bankroll the nation, Iran can't afford to lose such an enormous customer in the West.
I want to highlight one important note from the interview that Fox's graphics departments failed to capture from Kent's comments yesterday. China represents 20% of Iran's crude consumption, making it the exporter's largest customer, according to the U.S. Energy Information Administration (EIA).
But the graph near the three-minute mark doesn't capture the important point that Kent makes. It has individual countries listed by a percent of Iranian exports, only listing Italy at 10%.
Europe as a whole represents Iran's second-largest market for their crude, after China. Iran will not be able to replace a customer of that size in a short period.
This Doesn't Hurt Just Iran
Europe is highly susceptible to its own actions.
As Kent noted on Monday, boycotting Iranian oil would place Brussels and Europe in a very precarious position. The continent already relies too heavily on Russia for its natural gas supplies, a situation that's a growing concern for many diplomats in Brussels.
Europe would likely have to quench its thirst for crude by replacing Iranian crude with supplies from Russia, the world's largest oil producer. This would only intensify political tensions at a time when concerns about the future of the European Union experiment are still boiling.
All eyes will be on Iran and Europe until someone makes a move.
Meanwhile, risks to the market will be accelerating.
It's a fascinating story that continues to unfold, one that journalists and industry leaders are trying to wrap their minds around.
That's why they're all turning to Kent.
I'll be sure to keep you posted immediately if something significant happens.
Sincerely, James
James Baldwin, Money Morning
