Even as tensions simmer in the Middle East with the possibility of crude oil supply disruptions, prices are likely to be capped below the $80-per-barrel mark.
This rise in tensions between Iran and Israel is likely to sustain a high oil price risk premium in the short term, given the heightened supply uncertainties.
“In the medium term, however, the emerging oversupply argues in favour of lower oil prices,” Barbara Lambrecht, commodity analyst at Commerzbank AG, said.
Last week, Israel launched an assault on Iranian nuclear facilities, resulting in the deaths of several high-ranking Iranian military officials.
The action triggered a sharp increase in oil prices, with Brent crude surging by as much as 13% to a peak of $78.5 per barrel.
Since then, prices have fallen and settled in the region of $74 a barrel on Monday.
Monday’s subdued price movement does not indicate that the market has factored in a significant supply disruption, which would represent the worst-case scenario for oil, according to Rystad Energy.
Lower probability of further escalation
Rystad Energy’s research and discussions suggest a low probability of the conflict escalating into a full-blown war, thereby mitigating the risk of a significant oil price surge.
The most significant market-moving event to monitor is a potential blockage of the Strait of Hormuz by Iran, an occurrence that could push oil markets into uncharted territory.
This conflict presents three potential paths: de-escalation through diplomacy, continued but contained hostilities between Iran and Israel, or an expansion involving multiple nations, the Norway-based Rystad Energy said in an emailed commentary.
Currently, there are no indications of the latter scenario unfolding.
“As discussions continue over whether the US will attempt to de-escalate the situation—similar to its approach in the recent India-Pakistan conflict—or instead join forces with Israel to accelerate the military dismantling of Iran, major diplomatic efforts are also underway,” Rystad said.
We maintain our initial view that this will likely be a short-lived conflict, as escalation could lead to the situation getting out of hand for those who seem to control it now.
Price outlook
According to Commerzbank, the US-Iran nuclear talks add another layer to the recent escalation in tensions in the region.
Due to stalled nuclear deal negotiations between the US and Iran, the US government has announced the withdrawal of some embassy staff from Baghdad, raising concerns.
“The increased uncertainty speaks in favour of a higher risk premium on the oil price, which is why it is unlikely to fall below USD 70 on a sustained basis for the time being,” Commerzbank’s Lambrecht said.
Further escalation of the conflict, resulting in disruptions to the oil supply, would be necessary for a continued price increase, she noted.
Fundamental data is taking a back seat in the current situation.
Meanwhile, Rystad Energy believes that the US has the power to de-escalate the situation in the Middle East.
“Based on our earlier disruption simulations, we see oil prices capped below $80 per barrel.” said Mukesh Sahdev, global head of commodities market, oil, Rystad Energy.
Likely output hit
A severe impact on oil production is anticipated for Iran, Iraq, Saudi Arabia, UAE, Kuwait, and Qatar if tensions boil over.
These nations collectively account for approximately 25 million barrels of oil per day, Rystad’s data showed.
Not all of this output faces immediate risk.
The global refining system requires these predominantly medium sour barrels to meet summer demand, and other countries cannot easily substitute them.
Rystad estimated earlier that a sustained oil supply disruption of 1 million barrels per day could lead to prices nearing $80 per barrel.
If the disruption reaches 2 million barrels per day, prices could potentially hit $90 per barrel.
“We are not yet calling for oil prices to touch $100 per barrel on a sustained basis beyond a few days or weeks. The peak summer demand of August is a key time to watch,” according to the energy consultancy.
Oil demand
Though the Middle East represents only 10% of worldwide oil product demand, its direct effect on oil demand remains restricted, according to Rystad.
High oil prices hinder the growth of oil demand.
The two countries central to the crisis represent less than 2% of total oil demand, while the Middle East as a whole contributes approximately 10-12% to global demand.
For oil markets, therefore, this is clearly a crude supply and trade flows crisis.
“However, there is a strong likelihood of seeing a volatile shift in jet and bunker fuel oil demand,” Rystad said.
Additionally, the Strait of Hormuz sees about 15-20 million barrels of oil transiting through it daily.
If there are significant disruptions, oil flows to Asia remain in danger.
“So far, the Strait, the most critical oil transit route, has not been targeted,” Janiv Shah, vice president, oil at Rystad Energy, said in an emailed commentary.
We maintain our view that this is likely to remain a short-lived conflict, as further escalation risks spiraling beyond the control of key stakeholders.
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