Analysts See ‘Significant Yet Short Lived’ Oil Price Rallies

In a BMI report sent to Rigzone by the Fitch Group on Friday morning, analysts at BMI, a Fitch Solutions company, revealed that they expect “significant yet short lived rallies in oil and gas prices, followed by rapid retracement as regional flows normalize and geopolitical risk premia fades”.

The analysts warned, however, that the balance of risk to their current price outlooks is skewed squarely to the upside.

In the report, the BMI analysts said the U.S.-Israel war on Iran “has sent shockwaves through commodity markets since February 28” but noted that the response in crude has been “relatively well contained, with Brent rallying around 15 percent versus pre-conflict levels to trade at $84 per barrel”.

“This aligns with our core price scenario, which sees Brent trading in a range of $75-90 per barrel over the coming weeks, before selling off sharply in Q2, as investors refocus on bearish underlying fundamentals,” the analysts said in the report.

“However, escalation risks are substantial, with regional oil and gas infrastructure subject to attack and transit in the Strait of Hormuz effectively ground to a halt,” they added.

“A large conflict related risk premium had already been priced into Brent ahead of time and loose physical market fundamentals and large storage buffers are helping to cushion the initial blow,” they continued.

“Crucially though, price action reflects the expectation that the conflict (and its associated supply-side disruptions) will be short-lived and that risk premia will fade rapidly once the conflict ends,” the analysts stated.

The BMI analysts highlighted in the report that, so far, crude production and export losses “have primarily been the result of pre-emptive asset shutdowns, risk avoidance behavior around the strait and emerging storage bottlenecks”, all of which the analysts said can be quickly reversed.

“However, risk perceptions – and the associated price response – could easily change, if we see growing strikes on critical infrastructure (leading to compounding unplanned outages and extended repair horizons), or more kinetic disruptions in the strait (such as attempts by Iran to mine the waters),” the analysts warned.

The analysts pointed out in the report that, globally, “storage buffers are substantial, including large strategic reserves, commercial inventories and bloated volumes of oil on water”.

They warned, however, that storage capacity varies widely by market.

“Many larger economies have cover for several months’ demand, but many smaller economies, which have generally thinner buffers, could exhaust their stocks within weeks,” they said.

“Several markets have already announced export bans, to conserve supplies for their domestic markets,” they added.

In a statement sent to Rigzone on Friday, Aaron Hill Chief Market Analyst at FP Markets, highlighted that oil markets “continue to push northbound”.

“The focus remains on energy prices, driven by sentiment in the Middle East. WTI Oil ended yesterday higher by 3.6 percent, clocking peaks of $82.00 and is on track for its largest weekly gain since 2022,” Hill said in the statement.

Hill also pointed out in the statement that the FP Markets team noted on Thursday that “WTI oil is up 18 percent this month already – a move that triggered a breakout above the upper boundary of a monthly falling wedge, taken from $95.00 and $64.41”.

“This deserves notice as technical elements suggest further outperformance could be on the table until monthly resistance at $93.05,” the FP Markets team added yesterday.

“You may also acknowledge that the monthly flow is close to establishing a double bottom from lows around $55.00; the neckline extended from the high of $77.57 has been tested, but the pattern is not complete until a CLOSE north of the line is seen,” they continued.

To contact the author, email andreas.exarheas@rigzone.com