The intense rounds of air attacks between Israel and Iran has analysts and traders poring over scenarios for the direction of energy markets.
A wide range of outcomes are possible, with prices in the most extreme cases soaring above $120 a barrel, analysts at Deutsche Bank wrote in a note, but also drifting down to $50 a barrel next year.
The initial round of Israeli attacks sent oil prices 7 percent higher on Friday. Still, at about $74 a barrel, Brent crude remains below the $80 average for 2024, the Deutsche Bank analysts wrote.
Such relatively modest levels may seem surprising with fighting raging in a region that produces around 25 million barrels a day, according to Rystad Energy, a consulting firm.
The conflict is also flaring up at a crucial time for oil markets with the start of the summer driving season, when demand rises.
An initial bump in oil prices, followed by a fall.
Despite increasing risks, traders appear to be skeptical about the possibility of disruption. They are assuming that if international mediation manages to halt the fighting, prices could fall sharply.
“As long as supply has not been disrupted, I don’t think we are going to see huge jumps in oil prices, because the geopolitical risk premium is already factored in,” said Bachar El-Halabi, senior energy markets analyst at Argus Media, a commodities research firm.
A nightmare scenario that could double oil prices.
On the other hand, some analysts think the market is being complacent.
”We see the risk of a serious supply outage increasing significantly in an extended war scenario,” Helima Croft, head of global commodity strategy at the investment bank RBC Capital Markets, wrote in a note to clients.
The most worrisome scenario would be if Iran’s leaders close down the Strait of Hormuz, the narrow passageway that leads from the Persian Gulf and, eventually, to the Indian Ocean.
Around one third of the volume of crude oil exported by sea as well as 20 percent of the world’s liquefied natural gas, another vital commodity, flow through this cliff-lined channel bordered on the north by Iran, according to Rystad.
Deutsche Bank analysts think that if Iran were to block the strait for two months, prices could soar to $124 a barrel. But an effort to halt shipping is likely to bring a response from the United States, which has ships from the Fifth Fleet based in Bahrain on the Persian Gulf, and other countries.
And closing the strait would harm Iran, which exports most of its oil from terminals on Kharg Island in the gulf.
Prolonged fighting could push oil to $90 a barrel.
Deutsche Bank figures that based on current prices, the market is now assuming the loss of some of Iran’s exports, which recently have been around 1.5 million barrels a day. Most of this oil goes to China, but the small refineries there, which are Iran’s main customers, would need to find other sources of oil if these flows stopped.
Analysts may be focusing too much on the potential for closure of the strait, said Ms. Croft, who added that it would be “exceedingly difficult” to pull off for an extended period.
Instead, the Iranian navy could scare tanker owners by harassing cargo ships, which could disrupt shipping. Tehran could also encourage militia proxies in neighboring Iraq to threaten Baghdad’s oil infrastructure, which exports more than three million barrels a day.
The cost of hiring tankers to carry oil from the region has already jumped, according to Kpler, a firm that tracks shipping. But Kpler analysts said Monday that, so far, the flow of oil from the region was “as normal.”
If the fighting is prolonged, analysts like Ms. Croft said that Israel might hit Iran’s energy export installations to curb Tehran’s ability to finance its nuclear program.
In that case, analysts said, OPEC members like Saudi Arabia and the United Arab Emirates would increase output, but perhaps not by enough to fully offset the loss of Iranian crude.
Analysts at Goldman Sachs modeled one scenario in which Brent crude jumps to $90 a barrel after the loss of Iranian production but falls back toward $60 a barrel in 2026 as supply recovers.
Stanley Reed reports on energy, the environment and the Middle East from London. He has been a journalist for more than four decades.
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