Analysts Warn Outlook Remains Highly Fragile

In a report sent to Rigzone by the Fitch Group on Monday, analysts at BMI, a unit of Fitch Solutions, outlined that they continue to believe a broader diplomatic understanding between the U.S. and Iran remains achievable during this quarter, which they said “would involve the opening of the Strait of Hormuz”.

The analysts warned in the report, however, that the outlook remains “highly fragile”.

“Diplomatic progress is likely to be punctuated by periodic military flare ups, while miscalculation by either side could trigger a renewed escalation,” they said.

“We therefore maintain a higher probability of a shift to a more severe conflict scenario than earlier in July, with escalation risks remaining significant despite the current pause in hostilities,” they added.

The BMI analysts noted in the report that the key issue to watch is the future governance of Hormuz.

“Ongoing Iran-Oman discussions … suggest diplomatic efforts are underway to establish a post-conflict shipping framework,” they said.

Although the analysts highlighted in the report that their base case remains that a preliminary deal will be reached in the third quarter, they revealed that they have now further increased the probability of their escalation scenario from 25 percent to 35 percent “amid growing military, diplomatic, and economic indicators of rising U.S.-Iran tensions”.

In crude market commentary sent to Rigzone on Monday, Aaron Kildow, Crude Commodity Owner at Sparta Commodities, highlighted that Brent futures “saw a nearly $32 per barrel range in the month of July”, which he pointed out was “the second largest monthly range since the war kicked off in March”.

Kildow warned in this commentary that “the noose continues to slowly tighten as global demand exceeds supply” and said “tension is slowly building within some key exporting countries as their own inventories are becoming dangerously low”.

In a market analysis sent to Rigzone today, Waleed Said, Technical analyst at GivTrade, noted that Brent and WTI recovered after a sharp sell-off “as doubts grew over whether Iran talks were making real progress”.

“A credible deal could crush the geopolitical premium, but failed negotiations or fresh disruption in the Strait of Hormuz could send prices surging again,” he said.

Saxo Bank highlighted, in a market quick take posted on its website today, that October Brent bounced from Monday’s “steep sell-off” as U.S. President Donald Trump “called his latest offer on terms to Iran the country’s ‘last chance’. Saxo noted in this quick take that the September WTI front-month contract was less volatile, “bouncing slightly”.

In a commodities research note sent to Rigzone by the Goldman Sachs team on Tuesday, Goldman Sachs analysts said they estimate the fair value of Brent spot prices at around $80 per barrel based on their OECD commercial stocks counter, current OECD demand estimates, estimates of the long-term Brent anchor, and the historical relationship between stocks and spot prices (vs. long-dated prices).

“This suggests that the market prices only a moderate risk premium despite still very high uncertainty about Mideast supply,” the analysts noted.

The analysts revealed in the report that they assume Brent will stay in a $80-90 per barrel range “until either a confirmation of a new U.S.-Iran deal or a significant escalation in attacks and targets”.

They warned, however, that the physical oil market is tightening, and pointed out that their global visible stocks counter had reduced by 6.3 million barrels per day over the last two weeks.

This was likely driven by three key factors, according to the analysts - “lower flows from the Persian Gulf and the Red Sea, lower Russian oil exports, and stronger Asian imports, including to China”.

To contact the author, email andreas.exarheas@rigzone.com