Citi commodity analysts have downplayed the risk of a major oil supply disruption from the latest U.S. escalation against Iran, predicting limited military action against the country from the U.S. together with Israel.
That said, however, Citi expects developments in the Middle East to keep the geopolitical premium on oil prices, citing potential tanker seizures among the options considered by Washington, Reuters reported.
Brent crude settled above $70 per barrel for the first time in months on Thursday, with the rally fueled by the Iran escalation and the oil production disruptions in the United States amid a cold spell in major producing states.
There is a 70% chance of limited U.S/ and Israeli military action against Iran, Citi said in a note, adding that the decision would “reflect U.S. sensitivity to higher energy prices” and that “President Trump’s preference to avoid war and the likelihood that ongoing domestic pressures within Iran provide potential for changes that could lead to a deal.”
There is, as usual, the risk of Iran responding by closing the Strait of Hormuz, but it is not too significant, as the impact of such a disruption would harm Iran as well, for however long it lasts, given that the U.S. would not delay its own response to such a move.
In Citi’s best-case scenario, this year should see a nuclear deal between the United States and Iran, which would eliminate the geopolitical premium to oil benchmarks, which the bank’s analysts estimate at between $7 and $10 per barrel.
ING analysts summed up the current oil sentiment situation in a note saying that “Given Trump’s recent rhetoric, one would have to be fairly brave to head into the weekend short the market.” They added that “The oil market is also tighter than many had expected. The strength in the timespreads is at odds with expectations of a large surplus.”
By Irina Slav for Oilprice.com
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