(Bloomberg) — Oil futures were little moved by Iran’s unprecedented attack on Israel. Traders attributed the weak price action to the perception that the attack had been well-announced in advance and to the expectation that the conflict would remain contained in the aftermath. As Israel weighs its response to the attack, market watchers have this to say about the outlook:
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$100 is possible – Citigroup
Citigroup Inc.’s base case assumes tensions in the Middle East remain “extremely high,” supporting prices. This has led the bank to raise its near-term price forecasts and raise its three-month target for West Texas Intermediate by $8 a barrel.
“What we believe is not priced into the current market is a possible continuation of a direct conflict between Iran and Israel, which we estimate could lead to oil prices of up to +$100 per barrel, depending on the nature of events. “ “Analysts including Max Layton wrote in a note.
“Risk Premium” – Goldman Sachs
“We estimate that oil prices already reflect a $5 to $10 per barrel risk premium of downside risks and supply,” Goldman Group Sachs Inc. analysts including Daan Struyven said in a note ahead of the weekend attacks by Iran. “The possible Israeli response to the Iranian attack is highly uncertain and will likely determine the extent of the threat to regional oil supplies.”
Iran’s crude oil production rose more than 20% in the past two years to 3.4 million barrels a day, about 3.3% of global supply, analysts said. “So if the market were to price in a higher probability of a reduction in Iranian supply, this could contribute to a higher geopolitical risk premium,” they said.
More Risk for Direct Military Action – SocGen
“We believe that the immediate threat of direct confrontation has been contained – at least for now. At the same time, the edge of the event risk distribution has just become stronger as the possibilities of escalation involving the US increase,” said Benjamin Hoff, global head of commodities research at Société Générale SA.
Since Iran’s attack, the risk of direct military action between the US and Iran has risen from 5% to 15%, and Brent prices would rise well above $140 in such a scenario, he said. The bank has raised its Brent price forecast by $10 over the projection horizon to reflect the likely persistence of a geopolitical risk premium.
Uncomfortable silence – UOB
With the outlook for oil remaining highly uncertain, it is likely that prices will rise toward $100 a barrel or more if Iran’s crude production is threatened, United Overseas Bank Ltd. said in a statement. However, there is also a risk of renewed higher crude oil production from Saudi Arabia and the OPEC+ coalition, which could help stabilize energy markets, the bank said.
Watch out for possible reactions – ICG
Iran has signaled: “That’s it, it won’t do anything else, but I’m just not sure that not responding is an option for Israel,” said Dina Esfandiary, a London-based senior Middle East adviser at the Iranian Government International Crisis Group. “The only turning point is that the US has made it clear that it would not support an Israeli retaliation, so this could put some restrictions on Tel Aviv.”
Maintain balance – SVB Energy
“If the recent retaliatory attacks between Iran and Israel stop at their current levels or do not escalate in the region without damaging oil production and export facilities, the market should maintain its balance,” said Sara Vakhshouri, founder and president of SVB Energy International LLC . “Market fundamentals appear to be stable, with OPEC+ closely monitoring rising demand expected for the summer season. Should there be supply constraints in the market, OPEC+ could consider reducing voluntary cuts and increasing production.”
“Already priced in” – ING Groep
“The market had already priced in some form of attack, while limited damage and no loss of life means the potential for a more measured response from Israel,” ING Groep NV strategists Warren Patterson and Ewa Manthey said in a note. “How Israel responds is now the greatest uncertainty.”
For oil, “the first risk is that oil sanctions against Iran will be more strictly enforced, which could result in an oil loss of 500,000 to 1 million barrels per day,” they said. Other possible consequences would be an attack by Israel on the Iranian energy infrastructure or a blockade of the Strait of Hormuz by Iran.
“Into the Shadows” – RBC Capital Markets
According to analysts at RBC Capital Markets LLC, including Helima Croft, the Israeli government’s response to Iran’s attack will determine whether the situation leads to a larger war or whether the threat of escalation decreases. A significant Israeli retaliation could trigger a destabilizing cycle, they said.
“In such a scenario, we believe the risk to the oil is not insignificant given the Iranian seizure of the vessel in the Strait of Hormuz, which preceded the missile and drone attacks,” the analysts said. Still, “if Israel steps down or implements a de minimis response, it appears that Iran could well use the opportunity to bring this war back into the shadows.”
“Increased oil security risks” – IEA
According to the International Energy Agency, Iran’s airstrikes on Israeli military facilities have served as a renewed reminder of the importance of oil security while increasing the risk of volatility in oil markets.
Global oil markets had already tightened before Iran’s retaliation, and further geopolitical tensions in the Middle East are now becoming a focus on supply security, it said in a newsletter. The developments will be followed closely, it said.
“Escalation is unlikely” – ANZ Banking Group
“The fact that the attack was so well communicated suggests that further escalation is unlikely,” said Daniel Hynes, senior commodities strategist at ANZ Banking Group Ltd. “The geopolitical risk premium is also elevated, so no further gains are warranted until Israel’s response to this attack is clear.”
“The market needs to see further evidence that supply is at greater risk before pushing prices higher,” he added.
“Sigh of relief” – capital again
“The oil market can breathe a sigh of relief, at least for now,” said John Kilduff, founding partner of Again Capital LLC.
“There was a lot of reflection on geopolitical tensions last week, but there was no real escalation of tensions as the story unfolded.”
“Stricter sanctions” – A/S Global Risk Management
“The situation is uncertain and if Israel signals that it will not strike back, market tensions will ease,” said Arne Lohmann Rasmussen, head of research at A/S Global Risk Management. The market’s worst-case scenario is a closure of the Strait of Hormuz, although that outcome is unlikely, he said.
Instead, “stricter sanctions against Iran are likely,” he said. “The US-led sanctions against Iran are already very comprehensive, but Iran was still able to increase its production and exports last year.”
(Adds comments from SocGen and UOB in paragraphs six to eight)
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