Just days after the fastest drop in the price of oil in over a year (when mere days earlier Brent almost touched $100), the oil market is facing yet another potential kneejerk shock, this time in the opposite reaction.
In response to the sudden war between Israel and Hamas which could escalate and potentially drag in states such as Iran, Goldman’s commodity desk has laid out its thoughts on how the oil market may react. We excerpt the highlights below (full note available to pro subs).
As Goldman’s chief commodity strategist Daan Struyven writes on Sunday afternoon, amid the elevated uncertainty and incomplete information at this early stage, there has been no impact to current global oil production, and furthermore any immediate large effect on the near-term supply-demand balance and near-term oil inventories – which tend to be the main fundamental driver of oil prices – is unlikely. Therefore, Goldman continues to forecast that the Brent oil price rises gradually from $85/bbl as of Friday to $100/bbl by June 2024. That said, the bank identifies two potential implications of Saturday’s shocking attacks that may weigh on global oil supply over time.
1. Reduced probability of Saudi-Israeli normalization and associated boost to Saudi production.
The Wall Street Journal reported on Friday afternoon (before the attacks) that “Saudi Arabia has told the White House it would be willing to boost oil production early next year if crude prices are high—a move aimed at winning goodwill in Congress for a deal in which the kingdom would recognize Israel and in return get a defense pact with Washington, Saudi and U.S. officials said.” In our view, the escalating conflict in Gaza reduces the likelihood of a near-term normalization in Saudi-Israeli relations.
We continue to assume that Saudi Arabia unwinds the extra 1mb/d production cut, announced in June 2023 and extended through December 2023, only gradually by 2025Q1. We still expect Saudi crude production to stay flat at 9mb/d through 2024Q1, and then start rising by 0.25mb/d per quarter in the rest of 2024. Along with the decline in oil prices over the last two weeks, and limited evidence for large draws in global commercial visible oil inventories over the past three months, this weekend’s developments reduce the probability of an early unwind of the Saudi production cuts.
All other things equal, our pricing framework suggests that a hypothetical scenario where Saudi crude production stays flat at 9mb/d in 2024—a scenario which now appears more likely than before the weekend— would raise our December 2024 Brent price forecast to $104/bbl, or $4/bbl above our $100/bbl baseline. In contrast, a scenario where Saudi crude production rises by 1mb/d to 10mb/d in January 2024—which would lower our December 2024 Brent price forecast by $8/bbl to $92/bbl—now appears less likely than before.
2. Downside risks to Iranian oil production.
We believe the de-escalating trend in regional tensions prior to this weekend’s events (as illustrated by the release of both Iran and US prisoners) had likely been an important factor behind the rise in Iranian oil production over the past year. For context, the International Energy Agency (IEA) estimates that Iran crude production has increased by nearly 0.5mb/d year-over-year as of August 2023. With the possibility of broader regional tensions re-escalating as a result of the conflict in Gaza, we think the risks to our Iranian production projections are now tilted to the downside.
We continue to assume that Iran crude production growth slows down significantly, and that Iran output edges up only slightly from 3.20mb/d in August 2023 to 3.25mb/d by January 2024. For reference, our 2024 Iran crude forecast of 3.25mb/d is 0.6mb/d below the production level Iran achieved in 2018Q1, before the US announced its withdrawal from the Joint Comprehensive Plan of Action (JCPOA). Our pricing framework suggests that any 100kb/d decline in Iran 2024 production relative to the baseline would mechanically raise the end-2024 Brent oil price by just over $1/bbl.
While Goldman’s view is relatively tame, others – such as Alpine Macro – are far more pessimistic, and in a note also published on Sunday (and also available to pro subs), the consultancy doesn’t hold back writing that “The conflict’s course is uncertain, but will very likely escalate, possibly contributing to a significantly risk-off global environment over the next 1-3 months. Think of Russia’s invasion of Ukraine in 2022.”
And here is the dire view of Alpine chief geopolitical strategist Dan Alamariu what the attacks could mean for the price of oil:
- Oil Dynamics: Short-term, the risk means prices should increase in the next few days and weeks. This could be sustained longer-term if the conflict deepens/expands.
- As Israel fights the Palestinian forces, the GCC countries are unlikely to boost oil production, and may signal further cuts, especially if Israel’s response seems disproportionate (i.e. Israeli attacks that harm Palestinian civilians are highly unpopular in GCC states). Yet, this is not the 1973 oil embargo redux; the GCC states do not want to support Iran either.
- The most extreme scenario involves Israel striking Iran’s nuclear facilities (~20% chance). This could spike oil prices well north of $150/bbl
Impossible? Within moments of hitting save, the WSJ published this: “Iran Helped Plot Attack on Israel Over Several Weeks.”
Iranian security officials helped plan Hamas’s Saturday surprise attack on Israel and gave the green light for the assault at a meeting in Beirut last Monday, according to senior members of Hamas and Hezbollah, another Iran-backed militant group.
Officers of Iran’s Islamic Revolutionary Guard Corps had worked with Hamas since August to devise the air, land and sea incursions—the most significant breach of Israel’s borders since the 1973 Yom Kippur War—those people said.