Oil can flare 57% to $110/bbl in worst-case on Iran-US tensions: Analysts

On the flip side, a deal between the US and Iran coupled with the excess global supply/capacity could see limit the upside after a volatile phase, analysts said.

Brent crude oil prices can hit the $110 a barrel (bbl) mark, up around 57 per cent from the current levels in the worst case scenario, if case tensions between the United States (US) and Iran escalate, analysts said.

 

On the flip side, a deal between the two nations and the excess global supply/capacity could see limit the upside after a volatile phase.

 

Crude prices have firmed by around 10 per cent since the US began positioning military assets in West Asia, as traders priced in a geopolitical risk premium. The move, analysts believe, reflects the asymmetric risk tied to the Strait of Hormuz. 

 

“If escalation threatens the Strait of Hormuz, premium becomes structural rather than proportional. Even partial disruption risk could embed a $20–$40/bbl geopolitical premium, reopening a pathway toward $95–$110+, well beyond mechanical impact of Iran’s barrels alone," Maulik Patel and Khushboo Balani of Equirus Securities wrote in a recent note.

 

Geopolitical risks, according to Joe DeLaura and Florence Schmit of Rabobank International, are keeping a 'fear premium' over 'fair value'.  

 

 

“We see escalation as the most likely scenario and prices spiking up to $90/bbl. Prices can fall back to the low $60s (for Brent) if the US does not attack Iran in the coming weeks,” they wrote in a recent note.

 

Strait of Hormuz

 

Crude oil prices have stayed elevated throughout February as the US has renewed aggression against Iran. On Friday, Brent crude oil prices traded around $70/bbl, after hitting a high of $72/bbl levels.

 

The oil market, according to analysts, is also focused on the threat of supply through the Persian Gulf. Nearly 20 million barrels crude and refined products transit the Strait of Hormuz daily, besides nearly 20 per cent of global liquefied natural gas (LNG). 

 

Compounding the issue, Rabobank International said, is that there is limited pipeline capacity available to bypass the Strait for Persian Gulf producers. 

 

The proximity of the Strait of Hormuz to major Iranian port facilities, such as Bandar Abbas, DeLaura and Schmit of Rabobank International believe, would permit Iran’s large inventory of small boats, fast attack craft, and fast inshore attack craft equipped with naval mines to rapidly engage or disengage from maritime exclusion operations. 

 

“However, a sustained delay of energy flows through the Strait is unlikely unless Iran can successfully mine the chokepoints," they said.

 

Excess supply

 

Those at Nomura, too, expect oil prices to remain volatile in the next few days in the event of an escalation of tensions between the US and Iran, arising out of the risk to Iran’s around 3.3 million barrels per day (mbpd) oil production, as well as potential disruption of Strait of Hormuz. 

 

However, the volatility, they said, may fade away once the peak uncertainties are behind, and in case of a prolonged war – as in the case of the Russia-Ukraine war. 

 

“This (price cap) is also supported by the fact that there is sufficient spare production capacity in the world to balance any potential supply disruption from Iran, in our view,” wrote Bineet Banka of Nomura in a recent note. 

 

That said, in the longer term, if the US is successful in achieving a regime change in Iran and install a stable, pro-West government, Nomura expects the sanctions on Iran to be removed, which in turn could see higher oil supplies going ahead.

 

“On an immediate basis the production could only rise by 0.3-0.4mbpd, which is the current spare production capacity of Iran. Oil price could also see downward pressure without any immediate increase in production as currently sanctioned supplies of nearly 3.3mbpd from Iran (which are largely sold to China at discounts) go mainstream, increasing global liquidity,” Banka said.