What Closing The Straits Of Hormuz Will Mean In 3 Simple Charts

Tyler Durden's picture




 

While WTI hovers around $105.5 (slightly underperforming USD strength), Brent has notably outperformed with the Brent-WTI spread now edging towards $20 (from under $15 two weeks ago). Given the increasing tension, we thought it useful to get a grasp of just what an oil-supply shock means. BNP points out that in all but one of the historical oil price shocks of the last 40 years, equities have notably underperformed oil (understandably) but the higher the oil price rise, the higher the chance of negative absolute returns for stocks. We also note that oil prices tend to rise in anticipation of the crisis and then explode (so arguing that we are discounting an event is proved moot) and the impact (in lost supply) from closing the Straits of Hormuz is an order of magnitude larger than the next five largest events. Regionally, positioning favors the middle-eastern oil producers obviously with Asian EM nations set to suffer dramatically worse than DMs.

 

Global Oil Supply Shocks...

According to the IEA, 24% of the Global oil consumption passes through that strait. If tensions in Iran increases and this possibility becomes a reality then that would lead to a big tail event.

A further spike of 20% in the oil price will be a serious threat to the global economy and we believe in that scenario the equity prices will quickly decouple from the oil prices as we show above in retrospect to the previous oil price shocks.

Oil Price Action During Periods Of Shock...

 

And how to position regionally: Oil Consumption Minus Production As % of GDP...

Crucially the stage is not yet completely set for demand crushing oil spike although current levels will already be sufficient to drive sector rotation.

Source: BNP Paribas

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Wed, 03/14/2012 - 16:01 | 2255569 GeneMarchbanks
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Spigots: OFF

Wed, 03/14/2012 - 16:05 | 2255586 TruthInSunshine
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Japan picked the wrong week to quit drinking AND to wean off of nuclear power.

Wed, 03/14/2012 - 16:09 | 2255604 Pinto Currency
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Bomb Iran!  This is most excellent cover for our decades of monetary inflation, say the Fed's owners.

Wed, 03/14/2012 - 16:24 | 2255657 redpill
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I don't understand the intellectual exercise here.  The US military has 2 carrier groups in theater and a third one on the way, they will never allow the straits to be closed.

 

To quote Herbert, "the spice must flow."

Wed, 03/14/2012 - 16:33 | 2255685 john39
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just because U.S. military may claim that the straight is open doesn't mean that transport co's or their insurers will allow ships to pas through...  you never know when a stray missle might get launched after all.

Wed, 03/14/2012 - 16:56 | 2255761 Pinto Currency
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Even if Iran had a nuke weapons program there is still no legal reason to bomb them.

 

Israel developed nuclear weapons, putatively with stolen US uranium, and where was the international coalition?  Same with India and Pakistan.

 

http://nuclear-news.net/2011/12/05/israel-stole-weapons-grade-uranium-from-usa-reprocessing-plant/

 

What the coalition will do is destroy Iran's civilian infrastructure just as with Iraq and Libya.

Wed, 03/14/2012 - 17:57 | 2255936 BigJim
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Ah, but you see, Israel has not signed the NPT. And neither did India or Pakistan.

This isn't about getting nukes - this is about upholding the rule of law! The Unites States of Amerika is the world's policeman, and a policeman knows his duty!

Wed, 03/14/2012 - 22:32 | 2256585 Chuck Walla
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"I wouldn't fight a dumb war"

~ Barack Obama 2008

Thu, 03/15/2012 - 03:09 | 2256917 Pinto Currency
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“I’m LeBron, baby. I can play at this level. I got game.”

 

Barack Obama 2004

 

"And don’t try to convince me with his academic credentials. Because nobody has seen them. Not you, not me, not the press. Nobody. (Do you even wonder why not?) Editor of the Harvard Law Review? Yet not a single article written by him. Not a single scholarly paper. On anything."

 

http://urbangrounds.com/2011/08/obama-not-smart/

Wed, 03/14/2012 - 18:05 | 2255961 Quantum Nucleonics
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Iran is a signatory to the Nuclear Non-Proliferation Treaty.  Isreal is not.  That's the key difference in legality.  Iran could withdraw from the NNPT, and no longer be subjet to the enforcement provisions of the NNPT via the IAEA and the UN Security Council.  That's what North Korea did.

It's clear Iran intends to develop a nuclear weapon(s).  They'll need to withdraw from the NNPT at some point.  Presumably, when they have a working weapon and are ready to test.

Thu, 03/15/2012 - 03:01 | 2256920 Pinto Currency
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And?

Wed, 03/14/2012 - 16:54 | 2255751 mkkby
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All they did was announce a missile test in the gulf a few months ago, and all shipping stopped on it's own.  Imagine if someone fires one missile a night at a ship.  That can't be easily stopped.  We couldn't pre empt random scuds, nor what Hizbola does virtually every day in southern Lebanon.

Try to pay attention in class kiddies.

Wed, 03/14/2012 - 17:07 | 2255769 TruthInSunshine
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I wuzn't leerned in the fancy publik skoolz but I heard those straights are narrow n' stuff and that just one or two car wrecks could jam it all up.

Wed, 03/14/2012 - 18:12 | 2255982 Coast Watcher
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A wreck or two alone wouldn't physically close the strait, but the insurance companies would immediately end coverage of any tanker passing through it, which  would have the same effect. During the "tanker war" in the 1980s Iran attacked a number of vessels with missiles, artillery, and aircraft. Oil importing countries led by the U.S. re-registered all the tankers under the U.S. flag and organized convoys to protect them.

Wed, 03/14/2012 - 17:30 | 2255874 redpill
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The very second Iran started firing at merchant ships, the bombing would begin.  Judging by the rhetoric they're going to get bombed anyway, but if Iran actually shot so much as a homing pigeon at an oil tanker we would get immediate, what do they call it now?  Oh yeah, "kinetic military action."  And if they actually sunk something?  Let's just say Diego Garcia would become a very busy place.  Neocon wet dream.

Thu, 03/15/2012 - 00:55 | 2256818 FeralSerf
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Or so the Zionists hope. Maybe they can get Mossad to help?

Thu, 03/15/2012 - 01:29 | 2256850 q99x2
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Yes the NWO could use a little destabilation support at ths point.

Wed, 03/14/2012 - 18:15 | 2255990 Quantum Nucleonics
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Eh, Iran's  SS1-C Scud missiles are barely accurate enough to hit a city.  They have no chance of hitting a ship.  Iran does have various land launched anti-ship cruise missiles.  The moment they started using these the US would have the all clear to bomb the launch facilities, along with pretty much everything else in Iran.  That's why Iran won't pull the trigger.  They are smarter and more patient than that.  They know that any military confrontation needs to be initiated by the US in order to have strategic PR value to Iran in the Muslim world.  Also, Iran knows that if they attacked merchant shipping, it gives Saudi Arabia, et al a free pass to join the US in an attack.

Wed, 03/14/2012 - 20:09 | 2256318 Jack Burton
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Iranian anti shipping missiles are mobile. Most are mounted on launchers that are self mobile or on trailers that any average truck can pull. Along with decoys that are simple to make, Iran could present hundreds of fake launchers while keeping the real thing under cover and exposing them for a few minutes before launch. The record of US air power taking out mobile missiles is very poor. Gulf war witnessed a zero kill ratio for mobile scuds.

The Russian sunburn, Iran's most capable system, is supersonic and wave skimming. Plus it can take evasive action at any point and just before impact performs evasive action to avoid point defense systems and also can pop up before impact to hit the target from above.

The USN ships best defense against modern anti shipping missiles like sunburn will be electronic jamming. What no one knows is how capable sunburns are in this area. Being self contained and not needing any information tranfer after initial targeting, they may be immune from jamming. Just depends what type of electronic package the Russians have provided to the Iranians.

Still, I give US airpower little chance of taking out more than a handful of Iran's mobile anti ship missile launchers. Their subs may also be able to release missiles from the torpedo tubes at close range.

We will only know how effective USN counter measures are when the balloon goes up!

Thu, 03/15/2012 - 01:00 | 2256823 FeralSerf
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It's a numbers game. If Iran has 100X as many launchers as America has ships, she only needs to get 1% of them through. The navy know this too.

Thu, 03/15/2012 - 01:01 | 2256824 FeralSerf
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It's a numbers game. If Iran has 100X as many launchers as America has ships, she only needs to get 1% of them through. The navy know this too.

Thu, 03/15/2012 - 03:02 | 2256922 Knobbius
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Remember, time and technology both march on.  You're talking about the tools and technologies of a war that is now 21 years gone, in which 1970's technology was still being used on both sides.  Our sensors, C2 systems, and countermeasures against missiles of all kinds are radically improved over what they were during the Gulf War.

Decoys are a problem, but we invented this field.  Generically, this subject is referred to as CCD (Camoflage, Concealment, and Deception).  Techniques for engaging in CCD and defeating adversaries' use of it are a big area of expertise and work in the DoD.  Remember, no decoy is a perfect replica of real equipment in all wavelengths and phenomenologies.

While our record against mobile launchers in 1991 was poor, it will not be that way this time around.  Any launcher that fires anything bigger than a paper airplane will be found, targeted, and blasted in about 2 minutes.

Also, you're not just dealing with the US Navy, or with any one defense.  Defenses against missiles are layered, and involve elements from all 3 services and a great deal of support from the intelligence community.  The integration of all of this is maybe the greatest improvement since 1991.  

The threat of Iranian subs is overblown.  Their locally-produced boats are junk; the only decent boats they have are imported Kilo-class diesel electrics.  But their crews are under-trained and their O&M practices are suspect.  They can cause trouble as part of a layered assymetric approach, but they'll be badly outclassed by Western naval forces.

So the Iranians will present an interesting challenge, but one that we can overcome.  Whether that will happen soon enough to bring back the tanker traffic is a different question.  The Iranian Navy, in a Hormuz-shutdown scenario, will likely have a short and exciting life.  Tactically they'll be obliterated.  But they may have more success in Strategic terms, by shutting down the shipping lanes for a few weeks.  Those few weeks could change the geopolitical dynamic very dramatically (think of Tet forcing Johnson to not seek re-election).

Thu, 03/15/2012 - 04:46 | 2256999 Vlad Tepid
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But the Iranians can afford to lose their entire Navy.  We can't afford to lose more than a handful of non-capital ships, if that.  

I think your confidence is swollen.  The Argentine Navy wreaked havoc on the British with mobile launchers and those were not easily found on the Falklands tundra - the coast of Iran is no tundra.  

As was said above, modren day missile warfare is merely a saturation game.  The layered, 3 service missile defense idea crumbles quite rapidly once the ignitions are lit.  Nothing, I am telling you NOTHING can stop a massive raid by Silkworm or Sunburns or their equivalent.  The ONLY factor that will determine whether US Navy ships sink or live to fight another day (if they're stupid enough to get caught in the Gulf) is the thickness and redundancy of their hulls and the skill of their damage control teams.

Also, Iranian sub, including the Kilos would be very unlikely to go after military ships.  They will sit in the Arabian Sea or the Gulf of Aden and wait for merchant (read, tankers) shipping that think they're in the clear as ost military assests are rushed to the Gulf.

Modern naval warfare is faberge eggs fighting with hammers and Nelson's warning was never more true - "A ship's a fool to fight a fort (or an entire national coastline acting as a short range missle battery.

Thu, 03/15/2012 - 04:36 | 2256988 Vlad Tepid
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What they mostly have are Silkworms and reverse engineered variants as well as better Russian stuff. These are SSMs.  No cruise missiles in the "Republic."  Those would be a long more dangerous and give Iran some serious stand off range.

Wed, 03/14/2012 - 17:28 | 2255871 Börjesson
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All Iran has to do to close the straits is to announce that "Sorry folks, but from now on we will shoot at any tanker trying to go through". Maybe, if they're not believed at first, they'll have to actually fire at one tanker. After that, the straits are effectively closed. No tanker will try to run the gauntlet until the US has so completely flattened Iranian offensive capability, and so fully occupied the Iranian shore (nothing less than boots on the ground will do) that they can guarantee that not even a goat herder with a handheld rocket launcher will try anything. For all the US superiority, that could still take weeks if not months.

Of course, for all the turmoil this would cause the West, it would mean the complete destruction of the Iranian state. It's very doubtful that they would choose such a path - unless, of course, it becomes clear that their state will be destroyed anyway. In that case, they've got nothing to lose.

Wed, 03/14/2012 - 18:05 | 2255957 JoeSexPack
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Stopping random Oniks missiles, or artillery rounds, either launched from mobile trucks, is a tall order.

 

Range of over 150 miles gives Revolutionary Guards plenty of places to hide. 1/week at Straight will close it.

 

Closing the Straight for 6+ months, due to high insurance rates, likely means a hyper-inflationary depression in the West.

 

That could bring down govt's & win this for Iran. Starnger things have happened.

 

http://en.wikipedia.org/wiki/P-800_Oniks

Wed, 03/14/2012 - 23:16 | 2256655 potlatch
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The non-proliferation argument that can be raised is quite interesting however.  If the case can be made, and in large part made in the form of the miltary forces assembled there standing to battle stations, that, from here on out nuclear latency shall be no longer tolerated by unstable states (yes: this is a fiat decalration: hello military backed political might, ie, the West) that changes the calculation, because now a putative moral right is on the side of an aggressive Western military stance.  Any beligerence can be taken as a sign of a non-stable regime, and thus *any* centrifuges are now disallowed by Universal Edict.

 

Tricky, but you have no idea what NATO is planning here.  I draw attention to the fact Britain is sending its finest newst naval vessels -- anti missile ships I believe -- huge capital investments, to the Gulf.  When I hear tell of French Marines in Dubai, I shall then now to batten down the hatches.

Wed, 03/14/2012 - 23:42 | 2256721 DaveyJones
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closing the straights is exactly what the West wants them to do - a "true" false flag that justifies the move to "ensure it never happens again." 

Wed, 03/14/2012 - 18:16 | 2255999 Cole Younger
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Its not so much the carriers, its the subs, cruise missles, and JDAMs that will keep the straits open...

Thu, 03/15/2012 - 04:50 | 2257002 Vlad Tepid
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What?

Wed, 03/14/2012 - 19:09 | 2256173 Jake88
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If there is a war the US could very well have three aircraft carriers at the bottom of the Gulf.

Wed, 03/14/2012 - 19:24 | 2256221 Citxmech
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Can't imagine that Qatar, Dubai, or Sudi Arabia would appreciate that very much.

Thu, 03/15/2012 - 10:36 | 2257657 Amagnonx
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Its possible that Iran has anti-carrier missles, the hyper velocity ones.  Carriers these days are pretty much going to get sunk by anyone with reasonable numbers of these missiles.  Carriers are for invading poorly armed 3rd world nations .. but even if Iran has the capability of sinking most of the US fleet in a few hours, Israel is likely to just go full retard and use nukes.

 

Attacking Iran is fairly dumb unless you simply don't care about any consequences - seems this may be the case.  The consequences that would be most useful would be assassination of people like, Rockerfeller, Bush, Cheyney etc .. if they could manage that, then Iran wouldnt be attacked.

Wed, 03/14/2012 - 20:03 | 2256308 Buck Johnson
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Thats exactly what this is all for, we bomb them in order to cover for the implosiong of the economy.

Wed, 03/14/2012 - 16:20 | 2255640 LongSoupLine
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Well, based upon the data in the 3rd chart, it looks like it's time to invade and "liberate" Mexico and Canada...(never trusted those shifty Canadians anyway.)

Wed, 03/14/2012 - 17:19 | 2255848 msamour
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Hey watch out you, or we'll have to send in more geese, and beavers. You don't know it but all your wooden infrastructure is being eaten away by our beavers. Next the bears, and the wolverines will attack your oilfileds in the Dakotas. Then you will be at our merci! Bwahahahahahahaha (evil laugh).

Wed, 03/14/2012 - 17:59 | 2255942 BigJim
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We can handle all the beaver you can send, pal.

Wed, 03/14/2012 - 21:35 | 2256477 krispkritter
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Eat Mor Beevr...

Wed, 03/14/2012 - 16:01 | 2255571 slewie the pi-rat
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bilary--she don't care!

Wed, 03/14/2012 - 16:02 | 2255575 NotApplicable
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Well, at least the boss may let us telecommute occasionally.

Wed, 03/14/2012 - 16:04 | 2255582 VulpisVulpis
VulpisVulpis's picture

Or in 3 words:

Everyone 

Is

Fucked

Wed, 03/14/2012 - 16:03 | 2255576 battlestargalactica
battlestargalactica's picture

Got bicyclez, bitchez?

Got physizal preciouz metalz, bitchez?

Got prepz, bitchez?

Wed, 03/14/2012 - 16:05 | 2255585 DionysusDevotee
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Bicycles?  How about Biodiesel..

Wed, 03/14/2012 - 16:05 | 2255588 ZeroIQ
ZeroIQ's picture

Why not a long brent CFD Bitchez?

Wed, 03/14/2012 - 16:49 | 2255734 The Swedish Chef
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Got bitchez, bitchez?

Thu, 03/15/2012 - 00:11 | 2256756 natty light
natty light's picture

I'm buying a few extra 5 qt. Castrol GTX before it goes up another few dollars.

Wed, 03/14/2012 - 16:05 | 2255591 CrashisOptimistic
CrashisOptimistic's picture

Fuck historical oil analysis.

This particular world has never existed before. There is nothing to be learned by these worshipers of "cycles".

This world has no cycles. This world has only a slope. Downward.

Wed, 03/14/2012 - 16:09 | 2255602 VulpisVulpis
VulpisVulpis's picture

So you're bullish?

Wed, 03/14/2012 - 16:21 | 2255644 CrashisOptimistic
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Oil spikes as demand for it outstrips available supply.  The businesses generating that demand can't get it and they fail outright.

This destroys demand and the price falls.

And then does it again, but with overall economic activity sloping downward over time.

So one is bullish sometimes, and not others, and all the time it doesn't matter because a lot of people have to die in this sequence.

Wed, 03/14/2012 - 23:19 | 2256663 potlatch
potlatch's picture

that's a good one vulpis ;)

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