Israel’s Response to Iran’s Strike Confirms Minimal Escalation View; Oil Markets Remain Oversupplied

Israel has launched strikes against Iran in retaliation for an attack on April 14 (see our April 15 note for more analysis). The limited scope of the attack (which also included targets in Syria and Iraq), Iran’s subdued response, and the ample warning Israel provided support our view that both parties wish to de-escalate tensions, in line with broader US and Group of Seven goals.

We reiterate our view that the upward movement in oil prices since February 2024 has been largely attributable to geopolitical risks and not supply, and we see more downside risks to $75 a barrel by the end of 2024 compared with a maintained movement beyond $100 a barrel. Saudi Arabia and OPEC+ have more than 5 million barrels per day of supply that can be added back to the markets if needed to cool off a price spike.

The US did announce new sanctions on Iran on April 18, but we see them as minimal. The Biden administration is heavily incentivized to keep oil markets calm during an election year. We see this in the type of sanctions announced, which target Iranian military entities rather than oil-related activities.

For now, this situation shields Iranian oil exports, which were about 1.5 million-1.6 million barrels per day in early 2024, compared with total Iran oil production of about 3.1 million barrels per day. We remain wary of a potential disruption to the Hormuz Strait, which handles about 30% of the world’s crude. However, the majority of the crude that transits the Strait heads to Asia, and virtually all of Iran’s crude is purchased by China. As a result, the US has very limited influence and ability to pressure Iran, as China is unlikely to stop buying Iranian crude. A more concerted effort by the US to pressure Iran and China via diplomatic means and sanctions is also likely to threaten the US-China relationship, creating a new set of challenges.