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Iran’s Attack Is Already Priced Into Oil Prices

We see more downside risks than upside at the moment.

We believe the Iranian drone and missile attack on Israel over the weekend places some additional stress on the oil markets. However, we also think the ample public and private forewarning from Iran amid rising regional tensions means the attack was already reflected in oil prices via a higher geopolitical risk premium.

We attribute nearly all the increase in oil prices (to around $91 a barrel from the mid-70s in February) to geopolitical concerns rather than supply risks. On the supply side, Saudi Arabia and OPEC+ have about 5 million barrels per day of supply (if not more) that can be returned to the markets if prices overheat and spike above $100 a barrel. We expect more downside risks than upside at the moment, and see a higher potential to touch $75 by the end of 2024 versus a sustained movement beyond $100 a barrel.

Oil Prices

We warned in our Oct. 9, 2023 note that the major risk for the oil markets remains a direct escalation of hostilities between Iran and Israel. This is not that scenario. We see it as a more limited retaliation for the earlier Israeli strike on the Iranian embassy in Syria. Iran has stated that with this attack, it considers the matter complete.

While we consider tensions in the region somewhat combustible, Saudi Arabia and Iran recently restored diplomatic ties. This suggests we are far from a scenario similar to the one that led to the 2019 attack on the Saudi Abqaiq oil facility, which temporarily shut down more than half of the country’s oil production. The United States and other Group 7 countries are urging Israel to consider its defense against the strike as a success and not retaliate.

The risks to the oil markets remain material if the situation escalates further. Iranian oil production was about 3.1 million barrels per day as of February 2024. Increased US economic sanctions against the country could reduce that amount by 500,000 barrels per day of production. A more dangerous scenario would be an Iranian attempt to close the Hormuz Strait, which handles about 30% of the world’s crude, mostly heading for Asia.

We also think US increases in oil production are an increasing counterweight to a potential conflagration in the Middle East. In December 2023, US oil production was 13.3 million barrels per day, based on data from the US Energy Information Administration, compared with 8 million barrels per day in December 2013. This production should act as a relatively stable source of calm for the markets. On the other hand, the Biden administration has one fewer lever to pull with the Strategic Petroleum Reserve. At 362 million barrels, the inventory has yet to be restocked to 2021 levels of over 600 million barrels.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Stephen Ellis

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Stephen Ellis is an energy and utilities strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc., covering midstream companies. Ellis is a former member of Morningstar’s China Economic Committee, which provides research on the long-term outlook for the Chinese economy.

Before assuming his current role in 2017, he was director of equity research for financial services and a senior equity analyst. He is also a former editor of the Morningstar Opportunistic Investor newsletter and a former member of the Economic Moat Committee, a group of senior members of the equity research team responsible for reviewing all Economic MoatTM and Moat TrendTM ratings issued by Morningstar.

Prior to joining Morningstar in 2007, he worked as a freelance analyst for The Motley Fool and spent three years working in project and financial analysis for Environmental Systems Research Institute (ESRI), a supplier of geographic information system software and geodatabase management applications.

He holds a bachelor’s degree in business administration and a master’s degree in business administration from the University of Redlands.

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