Oil prices are significantly underpriced and should be much higher than current levels if the U.S. proceeds with a planned naval blockade of the Strait of Hormuz, according to a veteran oil market executive.
Brent crude (CO1:COM) climbed above $103 a barrel on Monday, before settling at $101.6, after weekend talks between Washington and Tehran failed to produce a deal, intensifying an already fragile global energy backdrop. U.S. West Texas Intermediate (CL1:COM) climbed over 7% to roughly $104.
"The number we saw this morning — $103; 8% increase — is not reflective at all of what could happen if the US really decides to go with this interdiction,” Onyx Capital Group managing director Jorge Montepeque said on Bloomberg Television, “It really makes no sense. It should be $140, $150.”
U.S. forces are set to begin enforcing the blockade at 10 a.m. New York time Monday, targeting all vessels entering or leaving Iranian ports. Montepeque warned the move could turn a regional conflict into a global one, potentially disrupting up to 12M bbl/day of supply and triggering a sharp repricing in oil markets.
“This is, in one word: demented,” Montepeque said in the interview. “It makes no sense what the US is doing because they are so focused on Iran that they are losing sight of what they are causing to the world. And the pain is in Asia, the pain is in the South Pacific, the pain is in anybody that depends on oil.”
Oil prices may be around $100 a barrel for rest of the year if Trump dials back some of his actions, Montepeque added.
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