UK Sees Risk of $100 Oil Until 2028

The UK government has revised its internal oil price forecasts upwards, assessing that crude could stay around $100 a barrel until 2028 even with a US-Iran peace deal because energy flows from the Gulf are now expected to take longer to recover.

The new analysis warns of more persistent pressures on energy prices than previously thought and a worsening outlook for the global economy. It hasn’t been made public, but has been seen by Bloomberg News. 

While the UK government had initially envisaged around six months of disruption to energy markets after the end of the war, representing a relatively speedy recovery in flows from the Persian Gulf, it now thinks the oil supply from the region will take as long as 14 months to recover.

If the forecast pans out, it would represent yet another blow to Prime Minister Keir Starmer’s administration as it seeks to show British voters its bearing down on the cost of living. That’s not to mention the broader damage to the global economy as countries around the world grapple with higher energy and food prices, as well as fuel shortages. 

Domestically, the study suggests whoever is UK prime minister later this year will have to contend with a souring economic picture that could last some time. Starmer’s government is widely seen as close to collapse, with Greater Manchester Mayor Andy Burnham expected to launch a leadership challenge this summer, if he first succeeds in winning a parliamentary by-election on June 18.

A UK government spokesperson said in a statement that the country had a diverse and resilient energy supply. It said it was working with international partners to find a permanent solution to the Iran crisis and minimize the impact on households.

In a best-case scenario in which there is a deal between the US and Iran this year, the price of crude could still remain between $100-$150 a barrel until year-end because of a slower recovery of flows from the Gulf, according to the analysis. It projects the price of oil in this scenario to stay around $100 a barrel into 2028.

In a worst-case scenario in which the war restarts and there is fresh damage to regional energy infrastructure, further delaying the recovery of energy flows by several more years, the oil price could initially spike as high as $210, staying around $150 into 2028, according to the assessments. 

If that scenario were realized it would have sweeping global impacts on inflation and growth lasting several years, as well as lasting consequences for geopolitics and security, the report said. Bloomberg’s recession probability indicator for the UK has already risen to almost 40% in the past month.

The pessimistic projections were produced by the UK’s Department of Energy Security and Net Zero, and form part of a new whole-government assessment of the economic impact of the Iran war, according to people familiar with the matter. They have been presented to senior ministers, according to the people, who were granted anonymity discussing a confidential government analysis.

Even the more-modest price path set out in the study would exceed most analysts’ expectations. Brent oil traded at about $95 a barrel on Friday and isn’t expected to go much above $100 through year end, according to estimates compiled by Bloomberg.

Governments around the world, including the UK, have already pledged to release an unprecedented 400 million barrels of supply to deal with the supply crisis. However, because of the time it will take for flows through Hormuz to normalize, some analysts are estimating that the loss of as much as 2 billion barrels of supply is now a possibility.

A previous British government analysis seen by Bloomberg in March saw the oil price stabilizing back below $100 if there was a quick end to the war, with it rising to $150 in the event of a protracted conflict. 

The futures market is currently expecting oil to drop below $90 by November and carry on falling. The worst-case scenario modeled by the Bank of England has oil staying above $100 for at least the next two years, with inflation climbing above 6% by early next year.

Earlier this week, BOE rate-setter Megan Greene said the case for raising interest rates is strengthening as the Iran war continues. UK inflation is expected to climb near 4% later this year as energy bills for households and businesses climb.