SOC GEN: There’s A 5% Chance All Hell Breaks Loose In The Straits Of Hormuz

iran hormuz

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Societe Generale’s evaluation of risks around the Strait of Hormuz is supposed to reassure you.The French bank says there is only a 5% chance that Iran shuts the Strait, causing oil prices to explode and setting off a US military response.

Although it sounds scary, this evaluation leads to a relatively bearish oil forecast. Soc Gen’s year end target for Brent crude is $110, cheaper than it is today — though the bank acknowledges it might revise this estimate upward.

Here’s an excerpt from a report by Head of Oil Research Michael Wittner:

We believe it would be relatively easy for Iran to shut down the Straits of Hormuz, but that they would not be able to keep it shut for long. Importantly, Iran would not actually need to succeed in sinking an oil tanker or a naval ship to shut down the Straits. A credible threat would be enough to shut down oil shipments, because tanker insurers would stop coverage and traffic would cease. Threats could include mining the Straits; launching a surface-to-ship missile or maybe even just arming launch radars on those installations; or swarming armed small fast patrol boats around tankers – all of which would be detected by routine naval and air patrols conducted by the Western allies.

That said, we do not believe the Western allies would allow the Straits to be shut for a prolonged period. A disruption to oil flows would be considered a national and economic security threat, and if necessary, military force would be used to re-open the shipping lanes in the Persian Gulf. Our view is that Iran would not be able to keep the Straits closed for more than 2 weeks. In addition, after the re-opening, it would be possible to maintain security through the use of naval escorts for tankers, as happened during the 1980s Iran-Iraq war. In the event of a shutdown of the Straits of Hormuz, disrupting 15 Mb/d of crude flows, we would expect Brent prices to spike into the $150-200 range for a limited time period. The disruption would definitely result in an IEA strategic release. Lastly, the severe price spike would sharply hurt economic and oil demand growth, and from that standpoint, be selfcorrecting.

A Straits of Hormuz shutdown is not likely; we estimate the probability of this very high impact event at 5%. Although Iran may like the idea of retaliation and hurting its perceived enemies, it would hurt itself even more, by halting its oil export revenues. Moreover, Iran would do this at the cost of provoking a military response that would destroy much of its military and perhaps even target its nuclear program.