November 29, 2011 / 4:32 PM / 8 years ago

PIMCO sees oil spike to $140 or more if Iran attacked

* PIMCO sees four scenarios, with minimum spike to $140

* Doubts if OPEC would be able to cover lost supplies

* Market impact depends on duration, element of surprise

* Closure of Straits of Hormuz is “Armageddon scenario”

NEW YORK, Nov 29 (Reuters) - Oil prices would probably spike to $140 a barrel or more if Israel were to attack Iran, a PIMCO fund manager said on Tuesday in the latest piece of research to highlight growing concerns of a major market disruption.

“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,” wrote Greg Sharenow, a former Goldman Sachs and D.E. Shaw trader who joined PIMCO earlier this year.

“Therefore, any event could pose a formidable risk to the global economy.”

The Nov. 8 report by the U.N. watchdog International Atomic Energy Agency suggesting that Iran has pursued the capability to develop nuclear weapons has put OPEC’s second-largest producer back on the oil market’s radar, although experts still regard military action as unlikely. [ID:nL5E7MM2T6]

While some European nations push for a boycott of imports that could pinch shipments, analysts are considering the possibility of an “Armageddon” scenario that could fuel an unprecedented spike in oil prices just as the European debt crisis threatens to tilt the world economy into recession.

The impact of military action would depend not only on the duration and severity of the supply disruption, but also on the degree of surprise.

Sharenow noted that traders bid up oil prices months before the U.S. invasion of Iraq. Prices peaked shortly after it began, and then retreated.

Brent crude oil LCOc1 prices have risen 3.7 percent in the past two days, partly on growing concerns about Iran. but they are still down more than 4 percent since the IAEA report.

The stakes are huge. Of Iran’s 3.5 million barrels per day (bpd) of oil output, it exports about 2.2 million bpd — about double Libya’s shipments prior to its civil war. Sharenow said Pimco estimated that the Libyan outage added $20 a barrel to prices over the past six months.

Some 16 million bpd is exported through the Straits of Hormuz, about a third of all seaborne oil trade.

Sharenow outlined four possible scenarios, while stressing that he was making no prediction of the likelihood of an Israeli attack on Iran’s nuclear program:

* Minimal impact on exports, Western nations show readiness to release emergency reserves. Oil prices spike to $130 or $140 a barrel, then settle to trade at $120-$125

* Exports cut off for one month. IEA and Saudi Arabia rush to help make up for lost supplies. Prices could rise above $145 a barrel, exceeding their previous record, then settle to trade at $130-$135 a barrel after a few months.

* Exports cut off for half a year. Sees prices averaging $150 a barrel for six months, with spikes higher. Prices could fall back to $110 a barrel as exports resume, but could drop even lower if the global economy turns weak.

* The “Armageddon scenario” in which disruptions spread beyond Iran and/or the Straits of Hormuz are blocked. “Forecasting prices in the prior scenarios is dangerous enough. So, we won’t even begin to forecast a cap or target price in this final Doomsday scenario.”

PIMCO, known for its vast bond portfolio, also manages the world’s biggest commodity mutual fund family, with over $20 billion in its CommoditiesPLUS and RealReturn strategies. (Reporting by Jonathan Leff; editing by Jim Marshall)

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