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Trading Lessons

What If Iran Closed The Straits Of Hormuz?

Commodities / Crude Oil Feb 09, 2012 - 10:04 AM GMT

By: Andrew_McKillop

Commodities

Best Financial Markets Analysis ArticleJimmy Carter asked himself the same question 32 years ago and committed political suicide straight after - but had the time to install solar collectors on the White House roof, in winter, which incoming president Ronald Reagan moved swiftly to have ripped out. We are told that if Iran closed the Straits - possibly for a half day but not much longer before war action reversed the closure - this would give excited oil traders the leeway to make oil prices pop by $30 or $40 a barrel. Iran cutting off its crude oil exports to Europe, or having them embargoed by Europeans, would have a longer-term, slower upward impact on prices, especially in Europe, measured by a Brent premium against WTI that could go beyond $30 per barrel.


This sounds right, perhaps, but totally contradicts how Goldman Sachs sees oil prices in 2012: in Sept 2011 it set out its target prices for 2012. These are $126.50 for WTI and $130 for Brent, with almost no mention of Iran - but plenty on China and India. The Brent premium disappeared.

WHAT IS THE ECONOMIC TIPPING POINT FOR OIL ?
The Straits would need to be closed at least 4 to 5 days for double-digit oil price gains to build, one after the other, possibly levering the price to $180 for Nymex trading, and $200 for ICE trading in Europe. On the US retail gasoline market prices could be pushed to the 'magic level' of $6 for a US gallon: with the euro at a current value of $1.38, this means gasoline prices about 1.19 euro per litre.

This needs comparing with the Eurozone and UK average price, expressed in euro, of 1.60 euro per litre today 9 February 2012, with the Straits of Hormuz wide open for steaming !

To be sure car sales are down in Europe, but high fuel prices are not the driver - which is less credit and disposable income, and fear of unemployment haunting would-be drivers of new cars in Europe. High oil prices fell off the radar screen, along with global warming, as other real world problems moved up the menu. One of these is global economic slowdown, even affecting China and India, which quickly translates to rising oil inventories as world oil demand straightlines due to outright recession in Europe and the weakest-possible, near jobless recovery in the US. Linked to this, US Federal Reserve easing, and easing can only push down the world value of the dollar: some days, almost by miracle the greenback can fall against what should be called the loonie but isnt - the euro. Oil prices can and will rise in dollars, but in real value terms they are in straightline mode.

Why oil prices are so high in Europe, and can go higher, neither start or finish with the European political-decided action following the US, to embargo Iranian oil imports despite these being a double-digit percentage of imports for several countries including Italy, Spain and Greece, who really do have other and more pressing debt-deficit problems to bother about. European refining is a disaster zone hit by everything from the wrong balance of product outputs, still loaded to gasoline despite over 75% of new cars sold in many major markets being diesel-fuelled, to new environmental, health and safety regulations, and carbon reduction commitments adding ever more lead balloons to the cost side.

Europe in fact shows the US and its other competitor trade partners how uncontrolled energy price rises help tip the scales into economic stagnation and recession. The energy tipping point has already been attained, but Europe's political elites understand nothing.

OIL INDEXED GAS - AND COAL
Also today 9 Feb 2012, the US Henry Hub price for natural gas hovers round $2.50 per million BTU, but in Europe, helped by extreme cold weather and Gazprom needing to ship more gas to markets nearer home inside Russia and east Europe, and burning more gas to pump the stuff west along its massive and leaking gas grids, gas prices are close to $11.50 per MMBTU on average. To get the unreality of this we have to add these prices have been declining for some while - and only kicked up again with the extreme cold which has so far killed more than 500 persons across Europe.

What we find is that stern defenders of low cost nuclear power, like France's president Sarkozy who has no problem rubbing shoulders with total nuclear exit Chancellor Merkel of Germany, have decided that shale and coalseam gas extraction are a threat to planetary survival, and must be banned. These defenders of survival prefer importing Qatari LNG at up to $15 per MMBTU in cryogenic tanker ships that lose 1% of their total cargo weight of gas each and every day they sail, by evaporation. How much greenhouse gas CH4 this emits does not feature anywhere on nighttime news show interviews by planet-defending elite heroes of Europe. At $15, this gas is equivalent to oil energy at $87 per barrel - which for European leaders is dirt cheap oil, but not for European consumers, business and industry !

With no surprise, global coal exporters supplying Europe are doing what they can to oil index their Black Gold: European coal import prices are now close to 90 euro per ton (not $90 per ton), and this in a global macro context where coal prices have been slipping for months as recession trims the iron and steel industry's coal needs, only amortized by China's rising import demand for coal. When used in Europe for electricity production, coal is the No. 1 target for mandatory carbon and emissions reduction commitments and trading, further raising the effective per-ton price in Europe to over 120 euro per ton, reflected in "dark spreads", further driving speculative positions, and forward prices on the South African and AP12/14 coal swaps market.

For Europe, the prize isnt Daniel Yergin's Iran crisis style oil - but offshore windfarms and onshore solar power plants producing power at unit kWh prices as high as 15 - 20 euro cents. Related to oil energy, this is the same as oil at $320 per barrel, making sure that future European domestic electricity consumers will freeze in the dark, and industrial users will shut down and move offshore to escape from runaway electric power price growth, fully able to ruin their business. But as Europeans are told by the politically correct, this is the only way to shield Europe from price gouging gas and oil (and coal) exporters, and save the planet, all in one seamless move that only the dumb will not admire.

If Iran closed the Straits doesn't really matter to European elite deciders - they already set the juggernaut moving to strangle Europe's economy through out of sight energy prices. Gasoline prices of $6 a gallon came to Europe an awful long time ago.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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