Oil Prices Could Reach $120 per Barrel if Iran-Israel Tensions Escalate, Warns BMI Analyst

Tensions between Iran and Israel could drive oil prices to $120/barrel if supply disruptions occur, but experts believe current market factors may prevent a major price spike.

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Sakchi Khandelwal
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Oil Prices Could Reach $120 per Barrel if Iran-Israel Tensions Escalate, Warns BMI Analyst

Oil Prices Could Reach $120 per Barrel if Iran-Israel Tensions Escalate, Warns BMI Analyst

Crude oil prices could potentially soar to $120 per barrel if tensions between Iran and Israel continue to escalate in the Middle East, leading to severe supply disruptions, according to Ramona Moubarak, BMI's Head of Country Risk & Global Banking for the Middle East and North Africa (MENA). "Crude oil prices could potentially reach US$120 per barrel due to severe supply disruptions if tensions between Iran and Israel escalate further in the Middle East," Moubarak stated.

The warning comes amidst heightened tensions between the two countries, with recent direct strikes raising concerns about a potential conflict that could disrupt oil supplies in the region. On April 1, 2024, an alleged Israeli attack in Damascus, Syria killed 13 people, including two Iranian generals and five officers, and demolished part of the Iranian consulate.

Iran retaliated on April 13 by launching some 300 drones and ballistic missiles at Israeli territory, most of which were shot down by the Israeli army in cooperation with the US, Britain, Jordan, and other allies. Israel then launched a counterattack on Iran's central Isfahan province, home to Tehran's controversial nuclear program, on April 19, 2024.

Why this matters: The escalation of tensions between Iran and Israel poses a significant threat to global oil markets, as any disruption to supply through the Strait of Hormuz, a critical chokepoint for oil exports, could lead to a surge in prices. This would have far-reaching consequences for oil-importing countries and the global economy.

Despite the recent escalation, oil prices have not spiked as feared, with U.S. oil futures closing at $83.14 per barrel on Friday, the lowest settlement price since late March. Investors believe that Israel's limited retaliatory strike and Iran's lack of a major counterattack have erased the risk premium associated with the tensions. Experts suggest that a sustained war between Israel and Iran is difficult to imagine due to the power projection capabilities of their militaries and the high bar for all-out war that would disrupt oil supplies in the Middle East.

The oil market currently includes several 'shock absorbers' that could cushion the price impact of the Middle East tensions, such as OPEC's high spare capacity of about 5 million barrels per day, recent stock builds in major markets, and further increases in non-OPEC production this year. Barring an actual disruption to supply, these factors may keep oil from spiking to $100 per barrel. Analysts estimate that the oil market currently includes a geopolitical risk premium of 5-10 per barrel to reflect the risk of escalation in the Israel-Iran conflict.

While benchmark Brent crude prices briefly rose above $90 per barrel on Friday, triggered by unconfirmed reports of Israeli airstrikes against Iran, the price surge was short-lived as Iranian media downplayed the reported attacks. The future trajectory of oil prices hinges on developments in the Middle East, with two potential scenarios emerging: either a further escalation leading to supply disruptions and prices reaching $120 per barrel, or a de-escalation and a return to more stable oil prices. As Moubarak noted, "Crude oil prices could potentially reach US$120 per barrel due to severe supply disruptions if tensions between Iran and Israel escalate further in the Middle East."

Key Takeaways

  • Crude oil prices could reach $120/barrel if Iran-Israel tensions escalate.
  • Recent strikes between Iran and Israel raise concerns about supply disruptions.
  • Oil prices have not spiked due to market 'shock absorbers' like OPEC spare capacity.
  • Analysts estimate a 5-10/barrel geopolitical risk premium in current oil prices.
  • Oil price trajectory depends on further escalation or de-escalation of Iran-Israel conflict.