Our Global Commodities Strategist Martijn Rats explores three
possible scenarios for oil prices in light of geopolitical shifts
in the Middle East.
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----- Transcript -----
Martijn Rats: Welcome to Thoughts on the
Market. I'm Martin Rats, Morgan Stanley's Global Commodity
Strategist.
Today I'll talk about oil price dynamics amidst escalating
tensions between Israel and Iran.
It's Wednesday, June 18th at 3pm in London.
Industry watchers with an eye on the Brent Forward Curve recently
noticed a rare smile shape: downward sloping in the first couple
of months, but then an upward sloping curve later this year, and
into 2026. Now that changed last Friday.
The oil market creates these various shapes in the Forward Curve,
depending on how it sees the supply demand balance. When the
forward curve is downward sloping, holding inventory really is
quite unattractive; so typically, operators release barrels from
storage under those conditions. The market creates that structure
when the conditions are tight, and barrels indeed need to be
released from storage.
Now on the other end, when the market is oversupplied, oil needs
to be put into inventory, and the market makes this possible by
creating an upward sloping curve. So, the curve that existed
until only recently told the story of some near-term tightness
first, but then a substantial surplus later this year and into
2026.
Now when the tensions in the Middle East escalated late last
week, the oil complex responded strongly. But not only did
the front-month Brent future, i.e. oil for delivery next
month rise quite sharply by about 17 percent, the impact of the
conflict was also felt across all future delivery dates. By now,
the entire forward curve is downward sloping, which means that
the oil market no longer is pricing in any surplus next year – a
big change from only a few days ago.
Now, no doubt, Friday's events have sharply widened the range of
possible future oil price paths. However, looking ahead, we would
argue that oil prices fall in three main scenarios. Together
they provide a framework to navigate the oil market in the next
couple of weeks and months.
First, let's consider the most benign scenario. Military conflict
does not always correlate with disruptions to oil supply, even in
major oil producing regions. So far, there is no reduction in
supply from the region. If oil and gas infrastructure remains out
of the crosshairs, it is entirely possible that that continues.
In that case, we might see brand prices retract to around about
$60 per barrel, down from the current level of about $76 per
barrel.
Our second scenario recognizes that Iran's oil exports could be
at risk either because of attacks on physical infrastructure or
because of sanctions – mirroring the reductions that we saw
during 2018’s Maximum Pressure Campaign by the United States. If
Iran were to lose most of its export capacity, that would broadly
offset the surplus that we are currently modeling for the oil
market next year, which would then in turn leave a broadly
balanced market. Now in a balanced oil market, oil prices are
probably in a $75 to $80 per barrel range.
The third and most severe scenario encompasses a broad regional
disruption, possibly pushing prices as high as 2022 levels of
around $120 a barrel. Now, that could unfold if Iran targets oil
infrastructure across the wider Gulf region, including critical
routes like the Strait of Hormuz, through which a significant
portion of the world's oil transits.
The situation remains very fluid, and we could see a wide
spectrum of potential oil price outcomes. We believe the most
likely scenario remains the first – our base case – with supply
eventually remaining stable. However, the probabilities of the
more severe disruptions whilst currently still lower, still
justify a risk premium of about $10 per barrel for the
foreseeable future. As we monitor these developments, investors
should stay alert to signs such as further attacks on all
infrastructure or escalations in sanctions, which could signal
shifts towards our more severe scenarios.
Thanks for listening. If you enjoyed the show, please leave us a
review wherever you listen. And share Thoughts on the Market with
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