I thought it would be interesting to get peoples point of view on the possibility of Iran blocking the strait of Hormuz if further sanctions are carried out against them? and, more importantly, what these developments would mean for oil prices?
This is my view:
First, although theres significant clues that the world may face a recessionary environment next year oil prices have remained high due to the dwindling stocks in europe and elsewhere. A reduction in oil exports from Iran would provide a further cause to be bullish for oil prices.
The closing of the strait of hormuz would magnify the effect of these developments by several orders of magnitude because of the importance of the strait for world oil trade. Around 33% of world oil exports flow through there.
I think the strait only gets shut down if there’s military action (i.e. an Israeli strike on Iran’s nuclear facilities). Here’s PIMCO’s take on what they think could happen: http://www.pimco.com/EN/Insights/Pages/Playing-What-If-with-Oil-Prices-and-a-Potential-Strike-on-Iranian-Nuclear-Facilities-.aspx Cliff’s Notes version for those that don’t want to read it (it’s a short paper): Scenario 1 - Exports minimally effected. Oil at $120-$125. Scenario 2 - Iranian exports cut off for a month. Oil hits $145. Scenario 3 - Iranian exports lost for six months. Oil averages $150. Scenario 4 - Supply disruption around the region, Strait gets cut off. They call this the “Armageddon” scenario. They don’t even bother forecasting a price because the world would be so massively screwed.
The US maintains a fleet in that area of the world whose biggest purpose in life is to make sure the strait of Hormuz stays open. If Iran tried to close it, we would use whatever force was necessary to keep it open. If the US wanted to we could get air supremacy over the entire region and sink most of the Iranian navy in a week. They are definitely smart enough to know this and aren’t going to close the strait.
@JoeyDVivre You’re right but even a whiff of military confrontation would mean oil prices would blow through the roof. The thing is oil prices have remained stubbornly over 105/barrel reflecting the relatively tight supply-demand situation. This is the ideal environment for a little political tension to make the prices explode. The more I think about the situation the more bullish I get. What do you think are the downsides of going long oil at the point?
Downside of going long oil: a) Oil is already priced anticipating some kind of Mid-East turmoil. If it doesn’t happen prices drop. b) Recession is supposed to be bearish on oil prices but oil prices have remained agnostic to hints of recession. That could change. c) Oil is a volatile commodity that produces no income. Going long oil is a position management issue. The Iranian navy would never try to close the Strait of Hormuz. They have been very respectful of US Naval presence there and know just what would happen if they tried.
I call BS on Iranian’s bluff. They need the strait open as much as the rest of the world. There is not point going long on the oil as it is already priced in. if anything, if oil is keep going up, would consider short it.
Why do people talk about Iran like they’re some great military threat that’s going to invade Connecticut next week? The country sits on a sea of oil and they literally can’t produce enough gas for their population. They are poor, the military is weak, and the people aren’t even supportive of their government. Any threatening posture they take is obviously done because they are scared $hitless of the US.
@Lbriscoe you are right - in the case of a full blown war, Iran probably doesnt have a chance. But that wouldn’t stop them from intimidating the US with things like harassing cargo ships when they’re passing through the strait. With world conditions as they are and recent events of the middle east everyone is on edge and even brief confrontation would wreak havoc on oil prices. According to PIMCO when oil stopped flowing from Libya prices shot up by about $20. Can you imagine what diminished exports from Iran would do? Add to that the very real possibility of a military confrontation and you have a crisis of 1973 proportions. One thing we’ve learned from the governments in the middle east is that you cannot apply rationality to their actions. They are arrogant enough to think that they are better and stronger than the US.
Why do people run from bees? It’s not like a bee sting is going to kill you? Iran can cause a lot of trouble in the region, and it is potentially a nuclear power that has a stated policy aim of wiping Israel off the map. Nuking Jerusalem would be a big Islamic no-no, but Tel-Aviv, Haifa, etc. are certainly options that are on the table. If there are open hostilities between Iran and the US, it’s very possible that the Israelis might use that as a reason to take out any suspected nuclear development facilities in the meantime, and the US would be stuck between Iraq and a hard place. Ahmedinejad is not insane like Kim Jong Il, but he does seem to be out of touch with many realities, which makes rational-sounding reasons not to do things like attack the US, or Israel, or Iraq not necessarily good enough reasons not to go ahead and actually attack the US, or Israel, or Iraq. Recall also that the US invaded and took over the country just east (Afghanistan) and just west (Iraq) of them, so if they feel a bit threatened, it’s not completely impossible to understand why.