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Oil Prices Could Rise Further on Hormuz Delays, Analysts Say

(Bloomberg) -- Brent jumped by as much as 13% to above $82 a barrel at the open on Monday, and oil markets are now bracing for prolonged volatility and sustained disruptions in the Strait of Hormuz.

Tanker traffic through the strait effectively stalled over the weekend as US and Israeli attacks on Iran escalated into a regional conflict.

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About a fifth of the world’s oil and liquefied natural gas typically flows through Hormuz each day. Iran said the waterway remains open, but it also claimed responsibility for attacks on three oil tankers on Sunday. Shipowners have largely halted traveling through the chokepoint after the US declared a maritime warning zone.

Meanwhile, Saudi Aramco has halted operations at its Ras Tanura refinery in Saudi Arabia after a drone strike in the area, according to people familiar with the matter. The refinery, located on the Persian Gulf, can process 550,000 barrels of crude per day and is one of the largest in the country. ICE gasoil futures surged as much as 20%.

Here’s what analysts are saying about the risks:

Citigroup

Citigroup Inc. raised its short-term Brent forecast by $15 a barrel to $85. The bank expects the global benchmark to trade between $80 and $90 this week due to persistent risk to energy infrastructure and “disrupted” flows through the Strait of Hormuz.

“Our baseline view is that the Iranian leadership changes, or that the regime changes sufficiently as to stop the war within 1-2 weeks, or the US decides to de-escalate having seen a change in leadership and set back Iran’s missiles and nuclear program over the same time frame,” analysts including Francesco Martoccia and Max Layton said in a note.

If regional oil infrastructure gets hit, prices could rise as high as $120 a barrel, said Citi, assigning a 20% chance to this scenario.

Rystad Energy

“We are looking into a scenario where there continues a longer disruption to the Strait of Hormuz, for more than a few days, towards weeks or months, then we definitely see a scenario possible of $100 barrel,” Jorge Leon, head of geopolitical analysis at Rystad Energy, told Bloomberg television.

The impact of the OPEC+ production hikes might actually be very limited, as most of those additional barrels would also need to pass through the strait, he said.

Goldman Sachs Group

Goldman Sachs Group Inc. said the real-time risk premium for crude oil prices was about $18 a barrel, corresponding to its estimate of the impact of a six-week full halt of tanker traffic in the Strait of Hormuz.

The risk premium equates to the market pricing in a one-year disruption of 2.3 million barrels a day to global supply, analysts including Daan Struyven said in a note.

Disruption in the strait could also be “very significant” for gasoil, jet fuel and naphtha markets. About 9% of the world’s daily gasoil supply, and around 18% of jet fuel transited Hormuz last year.

“While the risks to our forecast are skewed to the upside, history suggests that price spikes driven by geopolitical shocks or/and temporary supply disruptions can be short-lived,” the analysts said.

Wood Mackenzie

Energy flows through the Strait of Hormuz could take a few weeks to reestablish themselves at the soonest, if the Iranian regime chooses to cooperate with the US, said Wood Mackenzie’s SVP of Refining, Chemicals and Oil Markets Alan Gelder.

Oil prices could exceed $100 a barrel if tanker flows in the strait aren’t quickly restored. Even with OPEC+ announcing plans to raise production in April, the bloc’s additional volumes and spare capacity will be inaccessible if the waterway remains closed

JPMorgan Chase & Co.

Disruption at the Strait of Hormuz is “largely precautionary” after insurers warned that they would cancel policies and raise premiums, rather than the result of direct attacks on the waterway, analysts including Natasha Kaneva and Lyuba Savinova said in a note.

However, risks could escalate if Iran’s leadership loses control of the Islamic Revolutionary Guard Corps, raising the odds of unpredictable attacks on regional energy assets.

“If the conflict lasts more than three weeks, Gulf Cooperation Council oil producers would exhaust storage capacity and would be forced to shut in production,” the analysts said.

Morgan Stanley

Morgan Stanley raised its oil price forecast to $80 a barrel for the second quarter, up from $62.50, analysts including Martijn Rats said in a note on Monday.

While no production has been shut in, markets are likely repricing the deliverability of Middle East supply, with an already-tight tanker market meaning even minor disruptions could magnify delays and the effective supply impact, they said.

RBC Capital Markets LLC

Oil risks hitting $100 a barrel if there is sustained navigational disruption, or attacks on critical energy facilities in the region, said analysts including Helima Croft.

While no production has been shut in and Iran has not moved to close the waterway, selective drone and rocket strikes have already pushed risk levels beyond what many shippers and insurers deem acceptable.

If the conflict drags on, the consequences could quickly become material. Regional producers like Iraq may have to shut in output if it cannot move its roughly 3.5 million barrels a day of southern exports, and any OPEC production increases would be moot if sea lanes remain compromised, effectively stranding regional supply.

FGE NexantECA

Any direct bid by Iran to enforce a sustained closure of the Strait of Hormuz would likely be brief as the country lacks the naval capability to manage such a feat, according to Chairman Emeritus Fereidun Fesharaki.

“It’s just a fear factor,” he told Bloomberg TV. “The Revolutionary Guard navy is a minor force compared with what the American navy, the British and the French can bring in.”

The conflict is likely to be resolved within four weeks, according to Fesharaki, who described the Iranian regime as a “paper tiger.” Oil prices have likely peaked after the initial rally, he added.

(Updates with comments from Morgan Stanley, RBC Capital Markets and FGE NexantECA)