In the category of Best Additional Worry in a Globalised Economy | FT Alphaville

In the category of Best Additional Worry in a Globalised Economy

The nominees are:

Signs of a hard landing in China, looming French elections, the prospect of rising sovereign bond yields, and the threat to oil supplies — lots of issues (other than Greece) have set investors’ nerves a-jangle.

But the Market Oscar goes to… (drumroll)(silence to create tension)(awkward close-ups of nominees)


Oil also won last year for its role in the Arab Spring, when civil war caused supplies from Libya to be cut off. UBS discusses why oil is again the focus of our attention:

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.

Last time there was a threat to supplies of this size, the International Energy Agency (IEA) coordinated a release of reserves. As the FT reports, the Obama administration is now under pressure to do just that before higher prices have a negative impact on the budding economic recovery.

But some fear that the timing isn’t right, especially given that the current shortage is due to sanctions and hence might be “diplomatically risky, potentially straining relations between the west and the producers’ cartel Opec, which would see it as a political weapon,” says the FT.

How big are those IEA reserves anyway? Can they make up the slack? Back to UBS:

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.

Cliff-hanger! What’s going to happen next, we wonder…

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.

Is this a reprise of oil’s previous role?

John Kemp of Reuters points out that hedge funds and other money managers seem to think so, as the long/short ratio is approaching similar levels:

Oil wishes to thank rigs, pipelines, internal combustion engines, renewable energy for being too expensive without large subsidies, refineries, standardised futures, Texans, all Americans with pickup trucks, the Hummer, and everyone else who helped along the way — you know who you are.

Related links:
Vitol warns crude could pass $150 – FT
COLUMN-Spot oil’s rise masks steady prices in 2015: John Kemp – Reuters