Playing ‘What If?’ with Oil Prices and a Potential Strike on Iranian Nuclear Facilities
•The market has less “cushion” than it did earlier this year due to significant production outages and relatively strong non-OECD demand, leading to sharp draws on inventories
•Excess capacity is virtually exhausted and we doubt other OPEC nations would be able to compensate for a reduction in Iranian oil production
•In light of these possible oil price spikes, investors should evaluate how their portfolios might be affected by a sudden or sharp burst of inflation
Below we outline four hypothetical scenarios for output and prices that could materialize if Israel attacks Iran’s nuclear sites. Again, we emphasize that we are not predicting the likelihood of Israel’s action or inaction in any way.
•Scenario 1: Exports minimally effected. Concerns would drive initial price response.
IEA would likely make statements about willingness to meet any shortfall in supplies. Oil could spike initially to $130 to $140 per barrel and then settle in a higher range, around $120 to $125, in relatively short order as a premium (mostly a risk premium
) becomes embedding into the market, at least for a while. The timing of the spike would depend on how much the market is taken by surprise and whether or not the strike is priced in ahead of time.
•Scenario 2: Iranian exports cut off for one month
. IEA would likely swing into action and Saudi Arabia could begin to offer more oil into market. In this case, we would expect prices could reach previous all-time highs of $145/bbl or even higher depending on issues with shipping. The IEA and Saudi Arabia can meet market needs, but the increase in uncertainty and the loss of spare capacity would affect pricing. In this case, after a few months, we would expect prices could fall back to $130 to $135/bbl range.
•Scenario 3: Iranian exports are lost for half a year
. This is where the potential outcomes get quite dicey. We think oil prices could probably rally and average $150 for the six months, with notable spikes above that level
. The IEA would likely release oil steadily, but consumption will need to take a hit from prices and slower economic activity. Once Iranian crude oil returns to the market and the environment stabilizes, oil would likely return to around $110/bbl or even lower depending on global strength at the time.
•Scenario 4: Greater loss of production from around the region, either through subsequent Iranian response or due to lack of ability to move oil through Straits of Hormuz. This is the Armageddon scenario in which oil prices could soar, significantly constraining global growth
. Forecasting prices in the prior scenarios is dangerous enough. So, we won’t even begin to forecast a cap or target price in this final Doomsday scenario.