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.
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