Where do we go from here?
That’s the question Rystad Energy Senior Vice President Jorge Leon posed in an oil market update focusing on Iran’s attack on Israel, which was sent to Rigzone this week.
“Is this the start of a direct war between Israel and Iran and its allies or was Iran’s attack a calibrated and well-telegraphed retaliation,” Leon said in the update.
“The implications for the oil markets would be very significant,” he added.
The response from Israeli forces remains uncertain, Leon noted in the update, highlighting that multiple scenarios are being considered.
“The most favorable outcome would be the de-escalation of tensions, with the U.S. playing a crucial role,” he said in the update.
“White House National Security Council Advisor John Kirby has expressed that he sees no reason to escalate tensions further. President Joe Biden is also actively engaging in diplomatic efforts with the G7 to reduce tensions,” he added.
“Still, it is unlikely that geopolitical risk premium will drop to levels prevailing before 1 April anytime soon. It is expected to stabilize or gradually decrease, as the markets had already partially priced in an Iranian response, anticipating it before the weekend,” he continued.
In a worst-case scenario, a forceful retaliation by Israel could trigger a spiral of escalation, potentially leading to an unprecedented regional conflict, Leon warned in the update.
“Under such circumstances, geopolitical premiums would increase significantly,” he added.
“Moreover, a new round of U.S. sanctions on Iran and stricter enforcement could further impact market prices, adding to the economic pressures already at play,” he continued.
Leon noted in the update that another significant unknown is how OPEC+ would react in this scenario.
“Increasing geopolitical tension has undoubtedly complicated the job of OPEC+ to carefully manage the oil market,” he said.
“Currently, the group has extended its voluntary production cuts until the end of June.
The group will most likely decide whether to unwind those cuts at the 2 June ministerial meeting,” he added.
“Still, if the geopolitical situation in the region escalates further, the group could hold an extraordinary meeting in the coming weeks,” he went on to state.
With almost six million barrels per day of spare capacity, the group could easily increase production to limit upside price pressure if the conflict escalates, Leon said in the update.
“But would they? We believe they would for three reasons,” he stated.
“One, sustained higher oil prices would fuel inflation again in the West and prompt central banks to postpone any monetary normalization efforts, leading to weaker global economic growth,” he added.
“Two, today’s world is very different from that of 1973 when an oil embargo was imposed. Geopolitical alliances are different now and OPEC would not want to repeat mistakes that prompted a global energy crisis with long-lasting implications,” Leon said.
“Three, OPEC has always emphasized, and proved, that the organization is not a political entity and that its role is solely to coordinate and unify the petroleum policies of its member countries,” he went on to state.
In a report sent to Rigzone on Monday, Erik Meyersson, the chief EM strategist at Skandinaviska Enskilda Banken AB (SEB), said the early signs of this weekend’s events point to an Iranian response calibrated to balance the need to retaliate and cement deterrence against actions that would lead to a large-scale war also drawing in the United States.
“Continuing Iranian attacks as well as an increase in the intensity of the barrage would constitute an unmistakable escalation and would significantly raise the risk of open war in the Middle East,” he said in the report.
“The over 300 projectiles launched so far constitutes a dramatic change from the previous status quo, but still amounts to an arguably limited amount given Iran’s supposed capability,” he added.
“An Iranian attack meant to cause more maximalist damage would likely involve a higher tensity, greater diversity in armaments and be complemented with similar escalation from Iran’s allies in the region,” he continued.
Meyersson noted in the report that how Israel reacts will be critical and said direct attacks on Iran’s territory would further escalate the situation “and likely draw in Iran’s allies in the region to ramp up attacks, not just on Israel but also potentially on Israel’s allies as well as Western targets more broadly”.
“In case Iran’s attack is accompanied by expanded attacks from its allies – e.g. the Houthis in Yemen, Shia militias in Iraq and Syria, and especially Hizbullah - this could constitute a degree of escalation that could be hard to climb down from and increase risks of miscalculation on the part of either side,” Meyersson went on to state.
To contact the author, email andreas.exarheas@rigzone.com
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