PIMCO: Playing ‘What If?’ with Oil Prices and a Potential Strike on Iranian Nuclear Facilities

  ​The market has less “cushion” than it did earlier this year due to significant production outages and relatively strong non-OECD demand, leading to sharp draws on inventories.

  Excess capacity is virtually exhausted and we doubt other OPEC nations would be able to compensate for a reduction in Iranian oil production.

  In light of these possible oil price spikes, investors should evaluate how their portfolios might be affected by a sudden or sharp burst of inflation.

Today, markets are much more vulnerable to significant price spikes stemming from a new supply disruption than they were during the 1990/1991 Iraqi Invasion of Kuwait or even 1980 Iran-Iraq War. Due to significant production outages and relatively strong non-OECD demand leading to sharp draws on inventories this past year, the market also has significantly less “cushion” than it did earlier this year when the Libyan conflict began.  Therefore, any event could pose a formidable risk to the global economy (e.g. a real supply disruption scenario would require higher prices to lower demand in order to balance the market). This could come at a time when the global economy, or at least the developed world, is facing fiscal headwinds and limits on monetary policy.

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