SocGen: It Would Be ‘Easy’ For Iran To Shut Down The Strait Of Hormuz, And Oil Would Surge To $150-$200

Iran’s threat to shut down the strait of Hormuz — a potential retaliatory measure against oil sanctions — has obviously emerged as one of the hottest economic risks in the world right now.

SocGen lays out the worst-case scenario:

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 self-
correcting.  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. 

(HT: ZeroHedge)