Oil Markets Were Already Positioned for Iran Attack

Oil markets were already positioned for Iran’s attack on Israel, analysts at FGE outlined in a flash alert sent to Rigzone.

“Over the weekend, Iran launched a missile and drone attack on Israel in retaliation for Israel’s attack on Iran’s consulate buildings in Syria two weeks ago,” the analysts noted in the alert.

“The market had been bracing for this scenario, with a huge amount of increased length seen in the market in recent weeks as a result,” they added.

The FGE analysts noted in the alert that their base case “assumes that this event marks the peak of escalation in the current conflict and tensions can start to ease from here, albeit slowly”. They also warned that Iran’s attack could end up being the trigger for a very bearish move in oil prices.

“As profits are taken and weak length is shaken out, prices should drop from recent highs,” the analysts noted in the alert, adding that there’s potential for prices to drop $5-10 per barrel in the immediate short term.

“Following the likely sell off early this week, risk premiums will start to return, and prices will shift back towards $90 per barrel,” the analysts said in the alert.

“As we move through 2Q, the market will then start looking toward OPEC+ and what the producer group plans for 3Q,” they added.

The FGE analysts highlighted in the alert that their base case “still assumes some easing of cuts in 3Q by OPEC+, although our conviction on this scenario is limited”.

“OPEC+ will need to be certain of two things, that U.S. supply growth is done and dusted, and that demand growth is OK,” they said.

“Despite firm prices, the latest IEA stocks data for January will not have helped in convincing OPEC+ that these conditions are being met,” they added.

The analysts stated in the report that a rollover of cuts and ongoing political risk and trade friction can see prices push higher, “towards $100 per barrel”.

“Our base case is for OPEC+ to now unwind some cuts. However, with ongoing political risk, Brent will still find itself averaging around $90-95 per barrel in 3Q, even with an additional 500-1000 kb/d of OPEC+ oil on the market,” they added.

In a research note sent to Rigzone on Monday, J.P. Morgan analysts said oil shrugged off Iran’s attack on Israel as geopolitical risk premium was already priced in and revealed the company’s base case for oil remains at $90 Brent through May and $85 in the second half of 2024.

“Since last October we have viewed market reaction to political events in the region to be excessive for two reasons,” the analysts noted in the report.

“First, main players in the Middle East have strong incentives to keep the conflict contained given the economic transformation currently planned and implemented in the Gulf region requires sustained absence of conflict,” they added.

“Second, the closure of Hormuz is a low-risk event as Iran will be shooting itself in the foot both economically and politically by irritating its main customer,” they continued.

In a separate report sent to Rigzone on Monday, Erik Meyersson, the chief EM strategist at Skandinaviska Enskilda Banken AB (SEB), said, “Iran’s unprecedented attacks on Israeli soil may be calibrated to balance resetting deterrence as well as avoiding escalation”.

“Yet the escalation has raised the risk of regional war. Critical issues to watch are possible additional Iranian waves of attacks, Israel’s reaction function, as well as the behavior of Iran’s allies in the region,” he added.

“For Middle East turmoil to feed into the global economy, we think this would require a significant escalation in both intensity and scope, as well as rapid oil price inflation to balance out the ongoing disinflation processes in global product markets,” he went on to state.

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