It’s a little late to be issuing a warning of soaring oil prices if Europe bans Iranian oil, but better late than never for the IMF to climb on-board the “what if” game. There are basically three “what if’s” to take into account once the ban takes effect…
- No Saudi response. The Saudis promise that they’ll make up the shortfall. If they don’t, oil prices immediately soar to $140, says the IMF. I say they immediately go to $160 in a month and over $180 in three months.
- An attempted blockade of the Strait of Hormuz by the Iranians. Even if unsuccessful, oil spikes to over $200 in a matter of days.
- Increased output from Saudi and a combination of other oil-producing countries to make up for the Iranian shortfall. Oil prices climb to $125 from nervous investors.
These are just basic scenarios. The nature of the military action to an aggressive move by Iran to block the Hormuz, for example, requires a careful analysis. How this cascades into more or less stability in Iran also needs closer examination. OPEC’s role and if it weakens or strengthens its power is right now an open question. I haven’t seen any in-depth analysis on this issue. There’s other aspects too that need to be addressed.
In general, we can say that unrest or any upset of the status quo would most likely cause prices to rise rather steeply as customers bid up future supplies to protect themselves against possible supply disruptions. From Britain’s Telegraph…
In a note to G20 deputies, the IMF said that sanctions by OECD nations could cut 1.5m barrels per day (bpd) from supplies, causing a “large effect on prices” unless replacement supplies were found.
“A halt of Iran’s exports to OECD economies without offset from other sources would likely trigger an initial oil price increase of around 20pc-30pc, with other producers or emergency stock releases likely providing some offset over time,” it said. Brent crude was trading at $110.64 a barrel yesterday.
Saudi Arabia has said it could “immediately” increase its production to compensate for any shortfall.
The EU voted on Monday to ban new oil export contracts from Iran, and to end existing contracts by July 1. Iran has threatened to retaliate by blocking the Strait of Hormuz, the main export route for supplies of about 17mbpd from the Middle East.
The IMF said the Strait’s closure “could trigger a much larger price spike including by limiting offsetting supplies from other producers in the region”.
I could envisage other OPEC producers tripping over themselves to raise output to capture $200-priced crude, to make hay while it lasts.
But, at the end of the day, I’m sticking to my prediction of $200 oil this year. Hope I’m wrong.
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