Brent oil futures, the benchmark in Europe, are already approaching $80 a barrel, levels not seen since August last year. The price of crude oil has been rising almost continuously for several days as the market anticipates Israel’s response to the Iranian missile attack early last week, which would in turn trigger further retaliation by Iran with an unexpected result for oil. Markets hate uncertainty and total uncertainty currently reigns among investors. traderscrude oil producers and investors. “This time the feeling is different,” they say of JP Morgane in a note published for clients.
Since October 2023, JP Morgan economists (and those at Citi) recommended selling oil because they believed the market reaction to political events in the Middle East was then excessive. First, major players in the Middle East had strong incentives to contain the conflict, given that investments and economic transformation made and implemented in the Gulf region requires peace and stability. Second, they view closing the Strait of Hormuz as a very low-risk event, as Iran would shoot itself in the foot and irritate its main customer (China), they say of JP Morgan.
However, these experts who admitIt’s a shame that “this time it feels different”. For starters, unlike October 2023, where the geopolitical premium was at least partially priced in, “Brent oil futures now trade in line with fair value, and the bullish risk bias is expressed through options: Bullish Brent call option volume hits record high“, driven by greater activity on contracts at $100 and above,” warn JP Morgan analysts. Even the reopening of Libyan fields has not calmed the oil.
It should be remembered that the levels of spare capacity within OPEC are significant. In other words, several countries can produce significantly more oil almost overnight. But what happens if that oil can’t be shipped to the West or China? Prices would skyrocket. Tamas Varga, analyst at PVM Oil brings together this risk in its latest customer analysis: “The available supply cushion, which currently stands at between 4 and 6 million barrels per day, will also mitigate the impact of unexpected supply interruptions, it is believed. The only problem is that this excess capacity is precisely in a region that is exposed to large-scale war,” warns Varga.
“In addition to potentially crippling Saudi oil production, closing the crucial Strait of Hormuz, through which 20 million barrels of oil, condensate and petroleum products and about a third of all maritime trade pass daily, would lead to shortages “tangible oil”. adds this expert.
This time it’s different
The pressing question for the oil market today is whether the conflict between Israel and Iran and their proxies will further intensify. Since the outbreak of conflict in Gaza last October, Israel and Iran have been at odds, but previous oil price hikes have been short-lived due to the lack of disruptions in crude production. In April, Iran and Israel exchanged blows (strikes) and Tehran launched a barrage of missiles and drones that was clearly telegraphed and caused limited damage. This was followed days later by a quiet retaliatory attack from Israel, with both sides signaling they did not want further escalation. Oil closed this week down about 3%.
In the months following the election of reformist President Masoud Pezeshkian in July, Tehran had publicly advocated moderation, even as Israel intensified its attacks on Hezbollah (Iran’s main ally), suggesting that Iranian leaders were ready to avoid a new direct escalation with Israel after the April attacks. missile exchange. “However, following the assassination of Hussein Nasrallah last Friday and Israel’s ground incursion into southern Lebanon, Iran, without warning, launched approximately 180 ballistic missiles at Israel, which gave Israel and its allies a significantly shorter response time. Tuesday’s attack was much larger than April’s, incorporating about twice as many ballistic missiles, although only a few managed to penetrate Israel’s sophisticated air defenses.
But the story doesn’t end there. These same experts assure that there is another nuance that could be of vital importance: “The other significant difference between today and what happened in April is that Israel’s recent offensive against Hezbollah significantly weakened his leadership and diminished the group’s ability to deal damage. Hezbollah’s weakness, coupled with Israel’s successful defense against Iranian ballistic missiles, could encourage Israel to exploit its advantage and forcefully counterattack Iran and its axis of resistance.even at the risk of suffering military and political losses,” warns JP Morgan.
The regional escalation has been accompanied by increasingly loud public rhetoric from Israel, with officials talking about destroying Iran’s nuclear program and its central energy facilities and Israel’s prime minister pledging the week last to shift the balance of power in the region for years. As in April, oil prospects appear to depend on the Israeli response to the attack… this time, “the response could be disproportionately stronger than in April to create dominant escalation and long-term deterrence,” warn the North American authorities. investment bank.
Israel’s options
Israel is considering several response options to retaliate against Iran, including attacks on missile launchers or on the oil infrastructure itself… “Israel, for example, could attack Iranian refineries or its main export terminal oil on the island of Kharg, in the Persian Gulf. , with the aim of interrupting the country’s oil revenues”, they admit at JP Morgan. However, it seems unlikely that this option will be accepted by the American administration, which would oppose any disruption of the oil markets in the weeks preceding the presidential elections.
Tamas Varga, from PVM Oil, explains that the Middle East is a powder keg and everything indicates that there is a risk that we will see “a spark that would ignite the region and send oil prices skyrocketing”. It is far from clear whether further escalation of the conflict is a realistic prospect or whether the warring parties will choose to exercise restraint and avoid raising the geopolitical temperature. Let us hope that, and in the interest of maintaining a remote possibility of rapprochement, Iran’s direct involvement and Israel’s scorched earth military strategy are about to reach their limits. »
This expert, who has been operating in the world of oil for years and has become one of the most respected voices, ends with a somewhat enigmatic message, which leaves the doors open to almost any scenario: “If the worst were to happen, refiners would rush to secure their supplies of raw materials, crude oil, and be unable to meet consumer and industry demand for products. This would lead to a shortage of refined oil which would bring cracking spreads to high levels. For now, despite the current fierce recovery, the doomsday scenario is not an alternative and the more attacks on oil infrastructure and trade routes are avoided, the more likely it is that anxiety will moderate. But again, who knows?” says Tamas Varga.
