Story by Andreas Exarheas| RigZone.com| Geopolitical risks in the Middle East have risen to their highest level since the start of the Israel-Hamas war last October, threatening oil prices.
That’s what analysts at BMI, a unit of Fitch Solutions, said in a BMI report sent to Rigzone by the Fitch Group early Monday, adding that BMI’s Country Risk analysts “now put the probability of a regional war at 50 percent”.
“This could impact regional oil supply in various ways, such as via tighter sanctions enforcement on Iran, attacks on oil and gas infrastructure, and disruptions to trade,” they added.
“The potential disruption to production and exports is substantial, with MENA ranking as the dominant oil exporting region globally,” they continued.
“It is also home to three of the world’s major maritime chokepoints – the Strait of Hormuz, the Bab el-Mandeb Strait, and the Suez Canal – through which over a third of seaborne oil flows each year,” the analysts warned.
In the report, the BMI analysts said it is surprising that the oil market’s reaction to escalating tensions between Israel and Hezbollah has been so muted.
“Geopolitical developments in MENA have contributed to several rallies in Brent over the past 10 months,” the analysts highlighted in the report.
“Iran, Hezbollah, and the other allies in the ‘Axis of Resistance’ are widely expected to retaliate to the July attacks, but the timing and nature of this retaliation is unknown, creating considerable uncertainties,” they added.
“These are being reflected in other related financial assets, such as the Israeli shekel and the Iranian rial, but no such risk premium is being priced into oil,” they went on to state.
The analysts noted in the report that sentiment in the oil market is weak and that short positions have been building. They stated that market participants are currently more responsive to developments on the demand side than the supply side and more reactive to bullish drivers than bearish ones.
“That being said, oil markets are often subject to large and sudden shifts in sentiment and, should tensions in the region escalate further, there is a very real risk that investors are caught off guard,” the BMI analysts warned in the report.
“It is hard to quantify what the effect on prices would be, given that so much depends on the nature of the conflict. However, with a retaliation by the ‘Axis of Resistance’ all but inevitable, we see three key scenarios unfolding, with wide-ranging impacts for Brent,” they added.
The report outlined that a “small Israeli response, followed by de-escalation” has a 50 percent chance of occurring.
Under this scenario, “the bearish macro narrative retains its hold on the market in the near term,” the analysts highlighted in the report.
“However, with U.S. recession fears overblown, OPEC+ primed to put a floor under prices, oil oversold, and positioning overly bearish, Brent pares back some of its recent losses,” they added.
“The front-month contract trades in a $75-$85 per barrel range over most of the year,” they projected.
A “larger Israeli response, but only in Lebanon,” has a 45 percent chance of occurring, according to the report.
Under this scenario, “Brent rallies in the range of $5-$10 per barrel, comparable to the reaction seen after the start of the Israel-Hamas war”, the BMI analysts projected in the report.
“However, with no oil infrastructure directly at risk, prices recede as investors grow inured to the conflict and discount the threat of direct confrontation with Iran,” they added.
“The front-month contract is unlikely to push sustainably above $90 per barrel and will ultimately return to the $75-$85 per barrel trading range. However, more frequent attacks traded between Israel and Iran will allow for additional, if sporadic, risk premia,” they continued.
A “large Israeli response, both in Lebanon and Iran” has just a five percent probability of occurring, the report outlined.
In this scenario, “prices rally strongly, on par with the reaction seen in response to Russia’s invasion of Ukraine in 2022, with Brent topping $100 per barrel,” the BMI analysts highlighted in the report.
“Global oil supplies are impacted via some combination of reduced trade with Iran, direct attacks on regional oil infrastructure, and further disruptions in the Red Sea. How far Brent pushes into the $100s – and how long it holds there – is heavily swayed by the scale of these disruptions,” they added.
“In an extreme scenario where Iran blocks in the Strait of Hormuz, 15 percent plus of global trade is shut in and prices spiral above $150 per barrel,” the analysts warned.
Oil Price Projections
In the report, BMI analysts revealed that they have held on to their current forecast for Brent crude to average $85 per barrel in 2024 and $82 per barrel in 2025, “while acknowledging substantial risks to the downside”.
The analysts highlighted that the front-month contract “reached a year-to-date low … on its August 5 close,” adding that “the selloff … occurred despite a significant rise in tensions in the Middle East and reflects rising concerns over the health of the global economy”.
“We will review our price outlook at the end of the month and, absent clear signs of escalation towards a regionalized conflict in the MENA, will look to downwardly revise our forecasts,” the BMI analysts stated in the report.
A Brent price projection chart included in the report revealed that BMI expects the Brent price to average $81 per barrel across 2026, 2027, and 2028.
A Bloomberg Consensus included in the chart forecast that the Brent price will average $84 per barrel this year, $80 per barrel in 2025, $79 per barrel across 2026 and 2027, and $81 per barrel in 2028.
In a Saxo Group commodity update sent to Rigzone by the Saxo team last Friday, Ole S. Hansen, Saxo’s Head of Commodity Strategy, noted that crude oil began August on the defensive, “with prices suffering additional losses on top of those seen last month”.
“The market was dominated by concerns over Chinese demand and increased focus on whether the U.S. economy can avoid a recession,” Hansen said in the update.
“The recent loss of risk appetite across key stock market sectors culminated in a major deleveraging move out of short yen positions, sending shockwaves across global markets, including commodities,” he added.
In the update, Hansen said supply risks remain a concern, “particularly with the halt in production from Libya’s biggest field, geopolitical tensions surrounding Ukraine’s cross-border attack on Russia, and Iran’s promise to retaliate against Israel for a recent assassination in Tehran”.
“Despite these threats, the market has so far seen a limited reaction, with reports suggesting that Iran wants to avoid a region-wide war that could disrupt oil and gas flows from the Middle East,” he added.
Hansen noted in the report that Brent crude “hit the bottom of a long-held range between $75 and $90 per barrel” last week. He added, however, that “stabilizing markets, geopolitical tensions, a continued drop in U.S. crude stocks, and a technically oversold market condition helped support a small and ongoing recovery”.
“Considering current and potential future developments, the market may hold current support levels, but the upside potential appears limited to the mid-80s,” Hansen stated in the report.
To contact the author, email andreas.exarheas@rigzone.com
WHAT IS THE DEFINITION OF “GEOPOLITICAL RISKS”?
Geopolitical risks refer to the potential threats to international stability and economic conditions that arise from political events, conflicts, or changes in the geopolitical landscape. These risks can stem from tensions between countries, regional political instability, wars, terrorism, and shifts in alliances or government policies. Geopolitical risks often affect global markets by causing fluctuations in commodity prices, impacting trade routes, and disrupting supply chains. For instance, conflicts in major oil-producing regions can lead to uncertainty about oil supply, causing price volatility. Investors, businesses, and policymakers closely monitor geopolitical risks to anticipate and mitigate their impacts on the global economy.
