This page has been archived and commenting is disabled.

Mountain Of Worry Shifts From Olympus To Zagros

Tyler Durden's picture




 

Like sands through the hour-glass, these are the fears of our lives. Just as we noted last week, the focus of risk is shifting from Greece (where while 'tail-risk' has perhaps receded for now, it is all-but certain that the insolvency predicament will resurface as a source of political, policy, and market tension in the not-too-distant future) to other foot-holds on the growing wall-of-worry. As UBS' Larry Hatheway notes this week, several candidates may replace Greece in the risk headlines, among them rising bond yields, French elections, or a Chinese hard landing. But his sense, and ours, is that oil prices will become the next risk item for market participants. Partly this is because oil prices are already approaching levels where worries have occurred in the past (and the velocity of the move is also empirically troublesome) and partly as the remedy for all global-ills (that of central bank printing) is implicitly impacting this 'risk' in a vicious circle. With global growth expectations already low, the 0.2ppt drop in Global GDP for each $10/bbl rise in oil will do nothing for Europe and US hope - and leaves Central Banks in that dangerous position of reinflating their low core inflation data while all around them is inflating rapidly. With modest schadenfreude, we remind readers of our comments from last week: "Alas, as noted previously, the central bank tsunami is only just starting. Watch for inflation, and concerns thereof, to slowly seep into everything". Given oil's potential 'real' impact, as SocGen notes: "Perhaps Greece wasn't so bad after all."

 

UBS: After Greece, Oil

Of course, it matters what is driving up oil prices. This year, crude oil prices have tracked the upward trend in our global growth surprise index (Chart above). To the extent that rising prices reflect stronger growth, price increases can be sustained—up to a point. For oil consuming countries, rising prices will begin to crimp purchasing power. And although oil producers reap a windfall from higher revenues, their propensity to spend is modest. So although rising oil prices redistribute income, they don't proportionally redistribute expenditure. In short, rising oil prices boost global savings and depress global demand.

Based on results derived from simulations on large-scale macroeconomic models, global GDP falls by about 0.2 percentage points for every $10/barrel increase in oil prices, assuming the price rise is sustained for a full year. The impact is somewhat less for energy-efficient Europe, but larger for many emerging economies where the energy-intensity of GDP is relatively high.

To be sure, oil prices haven't been rising for that long. Still, with global growth forecasted at only 2.8% this year (a forecast based on an assumed average annual WTI oil price of $98/barrel), even small reductions in growth are worrisome. Also, with corporate profit margins already at peak levels, decelerating sales growth poses downside risks for already-flat non-energy corporate earnings growth.

Still, as noted, rising prices thus far appear to reflect better-than-expected growth. The big risk, therefore, is a disruption to supply. The leading candidate is Iran, given rising tensions over its nuclear program. That evokes memories of last year's oil price spike following the war-related disruption to Libyan supply.

A sudden stop to Iranian production would be more severe than the fall-off in Libyan output. Prior to last year's strife, Libyan oil production stood at 1.6-1.8mln barrels per day. The hostilities caused a collapse in Libyan output and exports, which have since recovered to about 1.0mn barrels/day (UBS
estimates). In contrast, Iran is the world's fifth largest producer of crude oil (2010 CIA estimates), although its production has recently dipped somewhat.

According to the latest estimates from the International Energy Agency (IEA), Iran produces just under 3.5mn barrels/day (from a peak near 4.2mn barrels/day), of which about 2.5mn barrels/day is exported.

According to the IEA, idle world oil production which can readily be made available in the event of a supply disruption is about 2.5mn barrels/day, almost precisely the level of Iranian exports. In short, if Iranian supply falls away, the world won't have much (if any) short-term spare capacity to make up any other shortfalls. That is important, given possible disruptions to supply in the Persian Gulf or to shipments via the Straits of Hormuz if military conflict with Iran breaks out.

We can't judge the risks of an escalation of tensions with Iran, much less the probabilities of a military strike against its nuclear facilities or any military response of its own to Mideast oil supply/shipments. But it seems reasonable to assume that in the event of such outcomes, crude oil prices would jump sharply from already high levels. And with little visibility about how long global oil supply would be at risk, we think it is fair to assume that in such a scenario investors would rapidly discount the risk of global recession, accompanied by collapsing corporate profits.

Perhaps Greece wasn’t so bad, after all.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Mon, 02/27/2012 - 13:04 | 2200798 slaughterer
slaughterer's picture

Long XOM / UCO

Short AAPL / XLY

This is not a vote. 

Mon, 02/27/2012 - 13:13 | 2200839 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

So you don't want a green +1?

Mon, 02/27/2012 - 13:28 | 2200890 slaughterer
slaughterer's picture

Mr. L.H. you can have all of the +1s. 

Prediction: market cap of XOM will overtake AAPL by our "summer of $6 gas" and "no money for iPad 3." 

Mon, 02/27/2012 - 13:33 | 2200904 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

If consumers were indeed rational you would be correct, but part of me thinks that people will pay for iPads over diapers for their infants.

Mon, 02/27/2012 - 14:37 | 2201068 redpill
redpill's picture

With the rising fierce competition alone in the smart phone and tablet arenas, there is no way Apple can maintain current market share.  Add in increased costs from having to pay employees of the Chinese suppliers enough that they don't commit suicide and all this talk about a dividend, I think being long Apple at this point is being way late to the party.  Like the-beer-is-gone-and-the-cops-have-already-been-called-late.  But what do I know, I'm just a human being, not a high frequency trading algorithm.

Mon, 02/27/2012 - 14:45 | 2201085 Totentänzerlied
Totentänzerlied's picture

What's wrong with reusing Junior's cloth nappies so Mom and Dad can afford to replace that last new iToy with the next new iToy with their 10th credit card?

Bullish for cloth and diaper pins! Short PG and KMB.

Mon, 02/27/2012 - 14:49 | 2201101 resurger
resurger's picture

you are long XOM ... i would be careful going long on those two fuckers (XOM & CVX)

 

Mon, 02/27/2012 - 13:30 | 2200895 trav7777
trav7777's picture

it is necessary to crush Iran's economy due to Export Land Model.

It will become necessary to crush KSA's in the future.  The internal consumption metrics of these nations make the world oil supply picture utterly untenable.

Mon, 02/27/2012 - 13:34 | 2200912 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

21st Century Crusade:  Oil for iPads

Mon, 02/27/2012 - 13:13 | 2200810 PaperBear
PaperBear's picture

Benjamin Fulford 2-27-12…”U.S. Treasury Secretary Timothy Geithner arrested, questioned and released; Asian negotiations continue”… “The CBS news network in the US…has…broken with the cabalists”

I have searched the cbs website for a report of this but could not find it.

I notice that Bush is now a target but Al Gore belongs on one of these lists too.

Perhaps back then Ben had only targetted one of the puppets but now the puppet masters are known - the Rothschilds.

Mon, 02/27/2012 - 13:07 | 2200816 mayhem_korner
mayhem_korner's picture

 

 

Oy. 

Thanks for planting that abysmal Days of Our Lives tune in my head.  Looks like I'll be heading back to therapy.

Mon, 02/27/2012 - 13:08 | 2200825 lizzy36
lizzy36's picture

1370 on deck.

Next up 1425.

Dow infinty just around the corner.

Life is good. Living the yank dream. 

This whole central planning thing is working well. 

Can you smell that? It is morning in America.

Mon, 02/27/2012 - 13:19 | 2200853 GeneMarchbanks
GeneMarchbanks's picture

Markets love command and control, you hadn't heard?

The buy bots are unstoppable from now until we reach the Kingdom.

Mon, 02/27/2012 - 13:22 | 2200866 Alex Kintner
Alex Kintner's picture

Yes, Mourning in 'Merica.

Mon, 02/27/2012 - 13:26 | 2200884 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

I take from your posts that Canada has tight fiscal and monetary policy and that Candians are participating in a market not attached to the global Fiat Ponzi.  I assume the loony is gold backed and you also have no income tax.  So Lizzy, when did you Cunucks tell the Queen you were no longer under her servitude?  Oh that's right, you didn't.

Mon, 02/27/2012 - 13:32 | 2200903 GeneMarchbanks
GeneMarchbanks's picture

I love how everyone is now being referred to in regard to their geographical position within ONE AND THE SAME PONZI.

I digress, so, Lizzy, RBC has hyper-hypothecated the shit out of my dogs ass in case you hadn't heard... again.

Mon, 02/27/2012 - 13:35 | 2200919 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

My ponzi is better than your ponzi!

Mon, 02/27/2012 - 21:37 | 2202337 Milestones
Milestones's picture

Are you referencing those (soiled) baby diapers from above?        Milestones

Mon, 02/27/2012 - 13:09 | 2200827 Goldilocks
Goldilocks's picture

Red Hot Chili Peppers - Californication [Official Music Video]
http://www.youtube.com/watch?v=YlUKcNNmywk (5:22)

Mon, 02/27/2012 - 13:13 | 2200838 Sutton
Sutton's picture

"If rising oil prices hurt the economy, I will print more money to boost the economy .  Problem solved.  And if that causes oil prices to rise further, I will print some more.  And if that causes oil prices to rise again, I will print more money.  And if rising oil still  hurts the economy, I will print again. It's so easy when you don't go through life like a dumb goy."

Ben Bernanke

 

Mon, 02/27/2012 - 13:16 | 2200844 The trend is yo...
The trend is your friend's picture

i guess this is what the muddle thru looks like.  I can't wait for the healthy recovery to come...dow 25000

Mon, 02/27/2012 - 13:16 | 2200846 pazmaker
pazmaker's picture

$3.83 Gas in rural western NC

Mon, 02/27/2012 - 13:18 | 2200854 Dick Darlington
Dick Darlington's picture

Looks cheap to me, i pay EUR 1,70 per LITRE.

Mon, 02/27/2012 - 13:21 | 2200864 pazmaker
pazmaker's picture

that's because you pay for your healthcare when you pay for your gasoline......also no public transportation here.

Mon, 02/27/2012 - 13:24 | 2200877 Dick Darlington
Dick Darlington's picture

Yep, big part of the price is just tax. Just like in everything else, esp food.

Mon, 02/27/2012 - 13:26 | 2200882 Shizzmoney
Shizzmoney's picture

$4.27 in San Diego.

Might be time to make some Syphon Funnels and sell em on the street.

Mon, 02/27/2012 - 13:33 | 2200909 GeneMarchbanks
GeneMarchbanks's picture

That's all? complain when you get to 6, mmkay?

Mon, 02/27/2012 - 13:24 | 2200874 JPM Hater001
JPM Hater001's picture

The market still looks drunk.

Mon, 02/27/2012 - 13:34 | 2200913 GeneMarchbanks
GeneMarchbanks's picture

Is it drunk enough is the question. Are you still tryin' to fuck it later on?

Mon, 02/27/2012 - 13:24 | 2200875 slewie the pi-rat
slewie the pi-rat's picture

with the forecast that we're d00med coming in stronger than ever, it appears we may be d00med

the global growth surprize index took a leap for mankind when slewie woke up with a semi this morning

Mon, 02/27/2012 - 13:34 | 2200907 Zero Govt
Zero Govt's picture

credit a build-up of overnight urine, not global growth prospects for your semi there Slewie

every morning is a growth day indicator, i'm not sure the male penis is an economic bell weather although there are some correlations i suppose!

Mon, 02/27/2012 - 13:35 | 2200885 LouisDega
LouisDega's picture

 Zagros... Never heard of that company. Whats the stock symbol? I may be interested

Mon, 02/27/2012 - 13:35 | 2200888 Zero Govt
Zero Govt's picture

"Perhaps Greece wasn’t so bad, after all."

Patience. We haven't suffered (the fallout) from Greece yet!

Up to ramming speed for the March Greece train-wreck, 250 tons of sour socialist yoghurt, this isn't going to be pretty!

Mon, 02/27/2012 - 13:30 | 2200894 adr
adr's picture

Is it really working like this?

Some guy at the NY Fed called. He said we now have $3 bilion in our account this morning and we have to buy stocks and commodity contracts with it. He said if we do there will be another $3 billion in our account tomorrow. We'll get to keep the profit and at the end of the day we pay back the $3 billion.

The guy said we need to make it look like the economy is getting better and the only way to do that is to send the stock market higher. I asked him what will happen to the economy when we send oil back to $150 a barrel? He said, what do you care you'll be rich.

Mon, 02/27/2012 - 13:36 | 2200918 Hedgetard55
Hedgetard55's picture

Bernanke must be sweating bullets now, knowing his head will be on a pike if he allows runaway inflation, and it will be on a pike if he raises interest rates to stop inflation, and crashes all markets.

Mon, 02/27/2012 - 13:45 | 2200950 RSloane
RSloane's picture

He will simply 'retire'.

Mon, 02/27/2012 - 15:47 | 2201371 Vince Clortho
Vince Clortho's picture

... to a small estate home on one of those "formerly Greek" Islands off the coast

Mon, 02/27/2012 - 13:44 | 2200946 SmoothCoolSmoke
SmoothCoolSmoke's picture

It seems to me that $5 gas affects more voters than 1225 SP.   No? 

Mon, 02/27/2012 - 14:00 | 2200982 WeekendTrader
WeekendTrader's picture

WTI is a broken benchmark. Using Brent would be more useful. Interesting article though

Mon, 02/27/2012 - 15:15 | 2201236 SemperFord
SemperFord's picture

I had to dump 2 of my girlfriends because they live too far (over 25 miles away) I am wasting too much $ driving from broad to broad, going to try hitting on the neighbor next!

Mon, 02/27/2012 - 17:23 | 2201691 Sokhmate
Sokhmate's picture

Me thinks this will be circa 2012 courtesy Holy-Wood.

 

http://farm4.staticflickr.com/3118/2644505909_6d71e9a64f_z.jpg?zz=1

Do NOT follow this link or you will be banned from the site!