Behind the Money

Risks to Global Oil Supply Rival Late 1970s: Report


The potential threats to the global oil supply—especially Iran's vow to close the Strait of Hormuz—have not been this great since the Iranian Revolution and Iran-Iraq War three decades ago, according to a report by Deutsche Bank.

“In our view, not since the late 1970s/early 1980s has there been such a serious threat to oil supply”, wrote Soozhana Choi, Deutsche’s head of Asia commodities research, in a note to clients today. “Our assertion is in part because of the Iranian threat to close the Strait of Hormuz.”

The report goes on to list the other oil “hot zones” as Iraq, Libya, Sudan, Nigeria, Syria and Yemen.

The biggest concern, however, is the strait through which more than 15 million barrels a of crude a day flow out from the Middle East. The North coast of the strait is Iran.

“We view potential Iranian disruption of shipping in the Strait as a low probability given the high damaging impact it would have on Iran itself,” said Choi. “However, the mere utterance of such a threat is a grave concern for the oil market given the strategic importance of the Strait on a global scale.”

Crude oil climbed higher Wednesday after Iran warned European purchasers of its oil that it may preemptively cut off supplies before they have a chance to install an embargo. Italy, France and other European nations have been pressured by the U.S. to place an official embargo on Iranian oil because of the rogue nation’s continued nuclear program pursuit.

The worry is that Iran may issue a similar verbal threat regarding the Strait of Hormuz, which could do as much damage as actually attempting to block it.

“I agree, but for a different reason, which is not the threat of closing the Strait of Hormuz, but rather from potential military action against Iran,” said Stephen Weiss of Short Hills Capital. “The spike in oil will add to economic pressures and increase probability of a deep recession in Europe.”

While Deutsche Bank said this it was not making an official prediction of what could happen to oil prices if one of these disruptions come to fruition, it did calculate in the report that the last four major oil disruptions (Gulf War I, Gulf War II, Iran-Iraq War, Iranian Revolution) caused Brent oil prices to jump 38 percent, on average, during these events.

To be sure, some people said traders are overreacting by pushing WTI Crude above $100 this week because of these empty Iranian threats.

“I disagree completely,” said Dennis Gartman of The Gartman Letter. “The world is facing an over-supply of energy, not an undersupply, in the very near future. There may be trouble in the Persian Gulf or one of the other ‘hot spots’ around the world, but there is no tightness of supply given the huge new finds of oil and nat-gas.”


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