Will crude oil prices skyrocket? Analysts weigh in after Iran’s attack

Oil futures were barely moved by Iran’s unprecedented attack on Israel, with traders attributing the lackluster price action to expectations that the conflict would remain contained. As Israel weighs its response to the assault, here’s what market watchers are saying about the outlook:

A Mobil gas station in Los Angeles, California, US, on Tuesday, April 2, 2024. US crude futures hit $85 a barrel in New York for the first time since October, as OPEC+ supply cuts underpin a steadily strengthening market. (Bloomberg)

‘Risk Premium’ — Goldman Sachs

“We estimate that oil prices already reflect a $5-to-$10-a-barrel risk premium from downside risks to supply,” before the weekend attacks by Iran, Goldman Group Sachs Inc. analysts including Daan Struyven said in a note. “The potential Israeli response to Iran’s attack is highly uncertain and will likely determine the extent of threat to regional oil supply.”

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Iranian crude production has risen by more than 20%, over the past two years to 3.4 million barrels a day, or about 3.3% of global supply, the analysts said. So, “if the market were to price a higher probability of reduced Iran supply, then this could contribute to a higher geopolitical risk premium,” they said.

‘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 key uncertainty.”

For oil, “the first risk is that oil sanctions are more strictly enforced against Iran, which could see anywhere between 500,000 to 1 million barrels a day of oil supply lost,” they said. Other possible outcomes include Israel attacking Iranian energy infrastructure or Iran blocking the Strait of Hormuz.

‘To the Shadows’ — RBC Capital Markets

The response from Israel’s government to Iran’s attack will determine whether the situation leads to a wider war, or whether the risks of escalation abate, according to RBC Capital Markets LLC analysts including Helima Croft. A significant Israeli retaliation could trigger a destabilizing cycle, they said.

“In such a scenario, we think the risk to oil is not insignificant given the Iranian seizure of the vessel in the Strait of Hormuz that preceded the missile and drone attacks,” the analysts said. Still, “if Israel stands down or carries out a de minimis response, it seems that Iran might very well take the opportunity to return this war to the shadows.”

‘Escalation Is Unlikely’ — ANZ Banking Group

“The fact that the attack was so well-telegraphed suggests any further escalation is unlikely,” said Daniel Hynes, senior commodity strategist at ANZ Banking Group Ltd. “The geopolitical risk premium is also elevated, so it doesn’t warrant any further gains 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’ — Again Capital

“The oil market can breathe a sigh of relief, at least for now,” said John Kilduff, founding partner of Again Capital LLC.

“There was lots of buying on geopolitical tensions last week, but as the story developed, what didn’t happen was a real escalating of tensions.”

‘Stricter Sanctions’ — A/S Global Risk Management

“The situation is fluid, and if Israel signals it will not retaliate, 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 seems unlikely, he said.

Instead, “stricter sanctions on Iran are likely,” he said. “The US-led sanctions on Iran are already very comprehensive, but Iran has still been able to step up production and exports over the last year.”

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