A recent release sent to Rigzone by Bloomberg Intelligence (BI) warned that, according to a new analysis by BI and Bloomberg Economics (BE), “an escalation to a direct war between Israel and Iran could result in oil prices rising to $150 a barrel and global output cut by $1 trillion”.
Ziad Daoud, Chief Emerging Markets Economist at BE and co-author of the report, said in the release that the organization’s base case is that the war will remain largely confined, with limited impact on the global economy, but pointed out that this could change.
“A risk scenario involving a prolonged conflict could result in a global recession that takes about $1 trillion off global GDP, with surging oil prices, and plummeting sentiment dropping growth to 1.7 percent,” Daoud added.
“Outside of the financial crisis and pandemic, that would be the worst growth for world economy since 1982, when the Federal Reserve hiked interest rates to contain inflation from the 1970s oil shock,” Daoud continued.
The BE representative noted in the release that the world economy is still recovering from an inflationary cycle exacerbated by Russia’s invasion of Ukraine in 2022 and said “another conflict in a critical energy-producing region could significantly recharge inflation to nearly seven percent this year”.
“The Fed’s two percent target would then be far out of reach and costlier gasoline would be a hurdle for President Joe Biden’s re-election campaign,” Daoud added.
Significant disruption of production in the Persian Gulf region, or to transport of oil in the extreme case of a potential blockage of the Strait of Hormuz, could shift OPEC+ policy to maximum output, according to BI and BE, the release stated.
In this case the spare production capacity in Saudi Arabia, the United Arab Emirates, and Kuwait would become irrelevant if the strait is shuttered, the release warned.
Salih Yilmaz, a Senior Oil Analyst at Bloomberg Intelligence and co-author of the report said, “OPEC+ members with spare capacity, like Russia and Kazakhstan, would benefit as they would have room to maximize production at higher prices to compensate for reduced output from the Gulf countries in the cartel”.
“The U.S. would likely have to tap its Strategic Petroleum Reserve to make up for some of the lost barrels and limit the impact on prices at the pump,” Yilmaz added.
“In addition, a direct war in the Middle East could push prices for liquified natural gas up by at least 35 percent if a Gulf-region conflict disrupts flows from Qatar, which sends more than 10 billion cubic feet of LNG through the Strait of Hormuz every day,” Yilmaz continued.
BI’s release pointed out that the new BI and BE study examined the impact of four scenarios “in the context of the ongoing Israel-Hamas conflict”. In addition to a direct war, the study looked at a proxy war, a “confined war”, and a ceasefire, the release outlined.
“A proxy war, where Iran and Israel clash through proxies such as Lebanon and Syria, while less destructive than a direct war, may cost the global economy up to $300 billion, as prices jump up around $10 a barrel and investor confidence subsides,” BI noted in the release, adding that this could cause a 0.3 percent percentage-point drag on global growth in 2024.
“A confined war scenario, characterized by limited Israeli airstrikes on Gaza and Hamas rocket attacks, could have muted impact on the global economy,” BI added.
“Oil prices shrugged off Iran’s April 13 strikes on Israel, suggesting that markets see the extension … of a confined war as the most likely scenario. BI and BE see risks for oil skewed to the upside as healthy demand and OPEC+’s tight grip on supply form a solid fundamental backdrop,” it continued.
BI stated in the release that the impact of a potential cease-fire on oil prices would likely remain limited as the current geopolitical risk premium appears negligible.
“In a recent BI survey, 92 percent of 143 respondents said that there’s a less than $5 a barrel geopolitical risk premium attached to prices by the market,” BI added.
“Red Sea attacks have had a limited effect on prices so far and OPEC has a meaningful amount of spare capacity (c. 6.8 million barrels a day), notes BI. Moreover, OPEC+ output policy likely won’t change in a ceasefire scenario if the impact on prices remains constrained,” it went on to state.
BI research delivers an independent perspective, providing interactive data and research across industries and global markets, plus insights into company fundamentals, according to Bloomberg’s website, which states that BE offers a comprehensive macroeconomic research service for Bloomberg Terminal subscribers.
In a report sent to Rigzone last week, Macquarie strategists said they expect the Brent oil price to remain rangebound between $80 – $90 through the second quarter of 2024.
“At this point, we believe the odds are greater that oil falls below $80 versus consistently rising above $90 given the slow but steady march towards a ceasefire and increasingly bearish fundamentals,” the strategists noted in the report.
“Following 2Q24, we anticipate oil will become bearish due to NOPEC supply growth, OPEC+ spare capacity returning to market, and demand disappointment as a result of stubborn inflation,” they added.
In a report sent to Rigzone earlier this month, analysts at Morningstar DBRS said the ongoing Russia-Ukraine and Israel-Hamas wars “could lead to a meaningful disruption of oil supply, potentially causing oil prices to surge”.
“Oil tanker shipments continue to be rerouted away from transit through the Red Sea. The impact on energy trade flows and the threat of a broader conflict in the Middle East is adding a risk premium to the current price of oil and could result in a material oil supply disruption,” they added.
“We will continue to monitor developments in the Middle East and Ukraine and assess whether our price forecasts and credit ratings need to be adjusted,” they warned.
In that report, the Morningstar DBRS analysts stated that, barring a major escalation in the Middle East conflict that would engulf major oil producers in the region, they anticipate oil prices “eventually trending lower to our midcycle pricing expectation of a range of $50 to $70 per barrel for West Texas Intermediate (WTI) crude”.
In its latest short term energy outlook, which was released earlier this month, the U.S. Energy Information Administration (EIA) warned that “there remains significant uncertainty centered around ongoing developments in the Middle East, which have the potential to increase oil price volatility and lead to sharp increases in oil prices”.
The EIA lowered its Brent and WTI oil price forecasts for 2024 and 2025 in its latest STEO. In its May STEO, the EIA projected that the Brent spot price will average $87.79 per barrel in 2024 and $85.38 per barrel in 2025. In its previous STEO, which was released in April, the EIA projected that the Brent spot price would average $88.55 per barrel this year and $86.98 per barrel next year.
The EIA’s May STEO forecast that the WTI spot price will average $83.05 per barrel this year and $80.88 per barrel next year. Its April STEO projected that the commodity would average $83.78 per barrel in 2024 and $82.48 per barrel in 2025.
“Prices increased in April due to falling global oil inventories. Geopolitical tensions also supported crude oil prices amid conflict between Iran and Israel, which added uncertainty to already heightened tensions in the Middle East,” the EIA said in its latest STEO.
“Despite these tensions, crude oil price volatility has been subdued for much of this year by significant spare crude oil production capacity. If holders of spare production capacity choose to deploy it, supply can be available to the oil market in the event of any short-term supply disruption,” it added.
“We estimate OPEC spare production capacity will be around four million barrels per day through 2025,” the EIA continued.
In an oil market update sent to Rigzone on April 15, Rystad Energy Senior Vice President Jorge Leon said further escalation in the Middle East cannot be ruled out and warned that this was “something that would rapidly increase the geopolitical risk premium in the oil market”.
At the time of writing, the Brent crude and WTI crude oil prices are trading at $83.19 per barrel and $78.95 per barrel, respectively.
