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Analysts Believe Oil Market Is Underpricing Risk

Analysts at Standard Chartered said they think geopolitical risk in oil has escalated significantly and the market is underpricing that risk. “We think Iranian actions and statements on 13-14 April represent a significant escalation in geopolitical risk that is likely to persist for an extended period,” the analysts said in the report. “We are not convinced by commentary suggesting that the scale of the Iranian attack on Israel was at the lower end of market expectations or/and was fully priced into the market before it happened,” they added. In the report, the analysts said they detected little evidence that market participants were quantifying the likely scale of the attack in advance.  “What discussion there was seemed to involve, at most, far fewer projectiles than the roughly 300 assorted drones, ballistic missiles and cruise missiles that were used,” they analysts noted. “Likewise, we do not think the market expected Iran to draw new red lines quite so explicitly and in a way that would leave relatively little room for obfuscation and de-escalation after a future flashpoint,” they added. “According to an Islamic Revolutionary Guard Corps (IRGC) statement on 14 April, Iran’s revised position is that any future attacks on Iranian interests anywhere will draw significant retaliation,” they continued. The Standard Chartered analysts stated in the report that the IRGC seizure of a cargo ship on April 13 seems to have been intended as a related signal of Iran’s ability to influence regional shipping flows.“In all, we do not think the oil market anticipated the scale of the attack, the new Iranian red lines (or ‘equation’ in the words of the IRGC statement) or the signal about shipping,” they added. “Further, we think the market is understating the risk of further escalation due to miscalculation, miscommunication, or other human error,” they continued. Also in the report, the Standard Chartered analysts said the company’s machine-learning oil price model, SCORPIO, “appeared to take the geopolitical turbulence in its stride”. “The SCORPIO indication for Brent settlement on 12 April was $89.81 per barrel, which was just $0.19 per barrel less than the actual settlement; the market screens last showed $89.81 per barrel less than 20 minutes before settlement,” they added. For settlement on April 19, SCORPIO indicates a price of $89.16 per barrel, with technical indicators and dollar strength the main sources of weakness, the analysts highlighted in the report.  In a note posted on Morningstar’s website earlier this week, which was also sent to Rigzone, the company’s equity strategist, Stephen Ellis, said Morningstar believes 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,” he added. “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 five 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,” he continued. “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,” Ellis went on to state. Morningstar warned in an October 9, 2023, note that the major risk for the oil markets remains a direct escalation of hostilities between Iran and Israel, Ellis highlighted in the company’s most recent note. “This is not that scenario,” he added.   “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,” he continued. “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,” Ellis went on to state. Ellis also stated in the note that the U.S. and other G7 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,” Ellis warned. “Iranian oil production was about 3.1 million barrels per day as of February 2024. Increased U.S. economic sanctions against the country could reduce that amount by 500,000 barrels per day of production,” he added.

“A more dangerous scenario would be an Iranian attempt to close the Hormuz Strait, which handles about 30 percent of the world’s crude, mostly heading for Asia,” he said.

Ellis also highlighted in the note that Morningstar thinks U.S. increases in oil production “are an increasing counterweight to a potential conflagration in the Middle East”.

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Israel Strikes Targets in Iran

  • Israel struck targets in western Iran, two US officials Say
  • Explosions reported in central city of Isfahan
  • Iran says Isfahan nuclear site is safe
  • Oil, gold, wheat jump on fear of Middle East conflict

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Iran’s Oil Exports Climb to the Highest Level in 6 Years

Crude oil exports from Iran hit the highest level in six years during the first quarter of the year, data from Vortexa cited by the Financial Times has shown.The daily average over the period stood at 1.56 million barrels, almost all of which was sent to China, earning Tehran some $35 billion.“The Iranians have mastered the art of sanctions circumvention,” Fernando Ferreira, head of geopolitical risk service at Rapidan Energy Group, told the FT. “If the Biden administration is really going to have an impact, it has to shift the focus to China.” The news comes as the EU and the United States prepare new sanctions against Iran in a bid to convince Israel to not retaliate against Tehran after the latter’s drone and missile attack on Israeli military targets last weekend. Iran’s oil industry would be the no-brainer target for new sanctions as suggested by U.S. Treasury Secretary Janet Yellen. “Clearly, Iran is continuing to export some oil. There may be more that we could do. I don’t want to preview our actual sanctions activities, but certainly, that remains in focus as a possible area that we could address,” Yellen said earlier this week as quoted by Reuters. Analysts, however, have told the FT that the Biden administration is reluctant to tighten the sanction noose too much as this would inevitably lead to an increase in oil prices that a president running for re-election cannot really afford in an election year. That’s especially relevant in light of the fact that the federal government would hardly be able to repeat the SPR release from 2022 to tame prices at the pump as the reserve sits at the lowest level in 40 years after that 2022 release. Also, any heavy-handed action against Iran’s oil exports would affect relations with China, which is virtually the only outlet for Iranian crude. That crude, according to the FT, covers a tenth of China’s total oil imports.

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Iran says it could destroy Israel’s nuclear facilitie…….. Iran Says Israeli Threats May Spark Shift in Nuclear Policys

A top Iranian general said his country may reconsider its nuclear policies if Israel threatens to attack its atomic sites, an implicit warning that Tehran might race toward a nuclear weapon as rhetoric continued to escalate in the wake of its April 13 drone and missile attack.

Islamic Revolutionary Guard Corps Commander Ahmad Haghtalab didn’t specify what the change might be, but Tehran has long said its nuclear program, which has prompted concern from the US, Israel and the United Nations for years, is solely for peaceful purposes. Haghtalab also said such an attack would prompt a tit-for-tat attack on Israel’s nuclear facilities.

“It’s possible and conceivable to revise the nuclear doctrine and policies of the Islamic Republic of Iran and deviate from the considerations of previous declarations” if Israel uses the threat of an attack on Iran’s nuclear facilities to pressure Tehran, he said, in comments reported by the state-run Islamic Republic News Agency. The comments fanned tensions that the US and its allies have been seeking to tamp down in the days since Iran launched a barrage of some 300 drones and missiles on Israel in response to a strike in Syria that killed several Iranian officers on April 1. Israel, the US and UK shot down almost all of the incoming weapons, but Prime Minister Benjamin Netanyahu and other top Israeli officials have said the country has no choice but to respond.

Speculation has mounted that Israel might use a retaliatory strike to target Iranian nuclear facilities. Iran has continued to enrich its uranium to 60% purity, part of work it’s pressed ahead with in the years since the Trump administration backed out of a nonproliferation deal that was meant to halt its nuclear advances.

“The nuclear centers of the Zionist enemy have been identified, and the necessary intelligence about all targets is at our disposal,” Haghtalab said. Israel has a nuclear-research center near the desert town of Dimona and is widely believed to have nuclear weapons though it’s never confirmed their existence.

The head of the Iranian Nuclear Protection and Security Corps Ahmad Haqtalab said on Thursday that Iran has identified Israeli nuclear facilities and has its “hand on the trigger” to target them if Israel attacks Iran’s nuclear centers, according to the Iranian state news agency Tasnim. He said Iran could “revise and deviate from the declared nuclear policies and considerations” if threatened.

Haqtalab assured that Iran is “ready to face any threat” from Israel “by using passive defense plans as well as highly advanced facilities and equipment, and due to the dispersion of our country’s nuclear complexes and facilities.”

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Netanyahu Is Caught Between Hitting Iran and Heeding Allies……….Iran says it could destroy Israel’s nuclear facilities

When Iraq fired dozens of Scud missiles on Israel in early 1991, the US implored then Prime Minister Yitzhak Shamir not to respond. Shamir said he had to act. After days of late-night calls, high-level visits and long cabinet meetings, Israel stood down and the US led a 42-nation alliance that defeated Iraq in what became the Gulf War. Iran’s decision to launch 350 missiles and drones at Israel last weekend was the first time since then that a sovereign nation carried out such an assault on the Jewish state. Another hardline Likud party leader, Benjamin Netanyahu, is prime minister and an equally frantic set of calls and visitors is urging him not to react while cabinet meetings focus on the need to do something. But while offering many parallels, the latest events are different from 1991 in at least one significant way: Israel’s powerful Western allies aren’t offering to do the fighting for it. Rather, they’re suggesting that no one challenge Iran militarily just now. And many in Israel, including in Netanyahu’s hard-right coalition, say that will not fly. Iran has said its mission is over after seeking to avenge an attack on its diplomatic compound in Syria. Israel claimed success after repelling the barrage with virtually no damage or deaths. Yet the urgent question remains whether the two plunge into a deeper direct conflict with repercussions beyond the Middle East, and how much of the answer comes down to Israeli politics — and Netanyahu’s survival instincts. “We can’t absorb this quietly,” Finance Minister Bezalel Smotrich said on Israel’s Army Radio on Wednesday. “We are at a crossroads regarding our place in the Middle East, as well as that of our children. Our deterrence is in a problematic spot, and a weak response is dangerous.” US President Joe Biden and UK Prime Minister Rishi Sunak have told Netanyahu all week to “take the win,” referring to the fact that — with their help and that of neighboring Arab states — Israel stopped 99% of the projectiles aimed at it. “One thing Israel realized on October 7 is that what we think of as ‘deterred’ is not necessarily so,” said Menahem Merhavy, a researcher on Iran at Hebrew University’s Truman Institute. “Hamas was not deterred; Hezbollah is not deterred. We still have Gaza on our plate and the hostages and the north. That’s where we need to put our focus now.” Jonathan Conricus, a former military spokesman for Israel, now a senior fellow at the Washington-based Foundation for Defense of Democracies, says that no matter what Israel will directly hit Iranian soil. “The minimum would be to strike Iran hard enough to cause them to pause and think many times again before doing this again,” he said.

Iran says it could destroy Israel’s nuclear facilities

The head of the Iranian Nuclear Protection and Security Corps Ahmad Haqtalab said on Thursday that Iran has identified Israeli nuclear facilities and has its “hand on the trigger” to target them if Israel attacks Iran’s nuclear centers, according to the Iranian state news agency Tasnim. He said Iran could “revise and deviate from the declared nuclear policies and considerations” if threatened. Haqtalab assured that Iran is “ready to face any threat” from Israel “by using passive defense plans as well as highly advanced facilities and equipment, and due to the dispersion of our country’s nuclear complexes and facilities.”

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UK reportedly expects Israel, Iran ‘back and forth’ attacks………Israel allegedly won’t strike Iran until after Passover

The United Kingdom government expects Israel and Iran to constantly engage in “back and forth” attacks, according to an anonymous source from the Defense Ministry cited by Politico on Thursday. According to the media, the UK is deeply concerned about how the two nations seem to be entering into a possible long-lasting and more frequent confrontation, leaving behind previous proxy clashes and passing into a situation never seen before. The report comes a day after British Foreign Secretary David Cameron and other EU leaders met with Israeli Prime Minister Benjamin Netanyahu who stated his government will make its “own decisions and will do everything necessary to defend itself,” from Iran.

Israel allegedly won’t strike Iran until after Passover

Israel is supposedly not likely to retaliate against Iran until after the Jewish holiday of Passover, ABC News reported, citing a United States official. The holiday begins on April 22 and ends after nightfall on April 30. The source cited by the news agency added that Iran is on high alert, with some members of the Islamic Revolutionary Guard Corps (IRGC) and other leadership sheltering in safe houses and underground facilities.

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Israel reportedly mulls hitting Iran’s nuclear facilities

Israel is considering targeting Iran’s nuclear facilities as a retaliatory measure to Saturday’s missile and drone attacks, Sky News reported on Wednesday, citing the former director of intelligence at the Israeli spy agency, Mossad, Zohar Palti. “No doubt. Everything is on the table right now,” Palti pointed out. In response to security concerns, Iran temporarily shut down its nuclear facilities on Sunday. Before the attack carried out by Iran, the London-based Elaph News reported that Israel had been conducting air force drills specifically aimed at preparing for potential strikes on Iranian nuclear facilities and other vital infrastructure in the event of an attack.NN;

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Can Netanyahu avoid triggering a regional war?

CNN — 

Israel, aided by its allies, dodged a bullet Sunday. To be more precise, 60 tons of explosives aboard more than 350 Iranian projectiles, some bigger than a family car, failed to dodge Israel’s defenses. Yet Israel, in defiance of US President Joe Biden’s warnings to “take the win” and Iranian President Ebrahim Raisi’s threat of a “severe, extensive and painful” response to any retaliation, is contemplating just that. Deterrence, shorthand for “meanest S.O.B. in the room,” Israel believes, is the cornerstone of its survival. Iran is stealing that brick. In a paradigm shift after decades of shadow proxy war, Tehran is usurping Israel’s strategy. “We have decided to create a new equation,” Iran’s Islamic Revolutionary Guard Corps (IRGC) Commander Hossein Salami said. “We will retaliate against them [Israel].” When faced with existential threats in the past, Israel has executed the most audacious raids the region has ever witnessed. Cloaked in extreme secrecy in 1981, they bombed Iraq’s nuclear reactor at Osirak before it went on line. Similarly, in 2007, they bombed Syrian dictator Bashar al Assad’s nuclear reactor before it could be built. Both attacks partnered intelligence with conventional military assets. It was 11 years before Israel admitted to the Syria strike. The point being, Israel won’t telegraph its plans as Iran did at the weekend, in carrying out an unprecedented attack in response to a suspected Israeli strike on the Iranian consulate in Damascus, Syria, earlier this month. Aside from the core members of Israel’s war cabinet – Prime Minister Benjamin Netanyahu, Defense Minister Yoav Gallant and Netanyahu’s former biggest political rival Benny Gantz – more than a dozen other people have sat at the table deep inside the Kirya, Israel’s maximum security defense headquarters in Tel Aviv, thrashing out their next move. Notably, Mossad Chief David Barnea and Army Chief of Staff Herzi Halevi are among several security and intelligence officials who have been brought in. Outside the room, Netanyahu faces huge pressure from his hard right governing coalition. Bezalel Smotrich is demanding he “restore deterrence,” and popular Minister of National Security Itamar Ben-Gvir is calling on the prime minister to “go crazy.” Outside Israel, where allies are condemning Iran’s attack but urging restraint and some are also bitter about Netanyahu’s deadly treatment of Gaza’s Palestinians since Hamas’s brutal October 7 attack, calls for fresh sanctions on Tehran are growing. War cabinet members Gantz and Gallant are both seized of the diplomatic opportunity – Gantz saying, “we will build a regional coalition to exact a price from Iran”, while Gallant, according to a government press release, “highlighted the opportunity to establish an international coalition and strategic alliance to counter the threat posed by Iran.” The defense minister has hinted heavily that Iran’s nuclear facilities are in his sights, saying it is “a state that threatens to place nuclear warheads on its missiles.” Netanyahu, meanwhile, said in a statement on the X account of his office, “The international community must continue to stand united in resisting this Iranian aggression, which threatens world peace.” Netanyahu’s next move will likely try to lock in sanctions, and strike before negative Gaza headlines dump the international good will filling his sails. The clock is ticking. He needs two things, time to prepare a significant surprise strike, and time to coalesce international diplomacy. As both march to different beats, his legendary political acumen faces one of its stiffest tests yet. Recent evidence suggests his finger no longer feels the regional pulse as it once did. Earlier this year, following Israel’s precise, targeted assassination of Saleh Al-Arouri, Hamas’s Lebanese chief, in a second-floor Beirut apartment, the former fighter pilot and former head of the IDF’s Military Intelligence Directorate Amos Yadlin told me Israel was acting inside “red lines” to avoid escalation. “The threshold is quite flexible,” Yadlin explained. “Deterrence is a decision at the head of a leader that can give a command to pull the trigger to launch a missile to start a war.” Yadlin knows a thing or two about deterrence and Israel’s past strikes against the nation’s existential threats. He was the fighter pilot who dropped the bomb that destroyed Iraq’s Osirak reactor in 1981, and in 2007 was the intelligence chief who planned the sophisticated audacious strike destroying Bashar al-Assad’s nuclear plant. Last weekend, Iran’s leaders decided Netanyahu’s calculation to kill Mohammad Reza Zahedi, the IRGC’s commander running their proxies threatening Israel from Syria and Lebanon, in their Damascus consulate on April 1 had crossed a red line. Netanyahu’s calculation was wrong. “I think the Iranians will be very, very careful, even if after a provocation is they will suffer a loss, but starting a war with the US or even with Israel. They are not there yet. The damage that can be inflicted on Iran is huge, is huge.” So the most important question right now must be, can Netanyahu read the room right – with Iran threatening to attack, allies warning him not to – and avoid triggering a regional war. And the answer to that is buried in Yadlin’s remarkable insights. Iran, he implied, won’t attack Israel as long as it fears America’s reaction. Netanyahu has so strained relations with the Biden administration over Gaza, Israel’s enemies smell blood. Since the US abstained at a UN Security Council vote last month to call for ceasefire in Gaza,  Hamas has taken an intransigent turn to hostage negotiations.Netanyahu is famed as a political survivor. But now he faces the biggest gamble of his career. He is betting the blood of his nation over Iran’s read of his rift with America.

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Rising Middle East Risk Sparks Fear of $100 Oil

  • Uncertainty over a potential Israeli retaliation keeps oil markets on edge.
  • In case of further escalation, $100 oil is possible, analysts say, especially if this involves direct threats to oil supply.
  • Lipow Oil Associates: The worst-case scenario for oil supply is Iran attempting to disrupt tanker traffic in the Strait of Hormuz.

Despite Iran’s attack on Israel over the weekend, oil prices dropped on Monday as an Iranian response to the Israeli hit on the Iranian diplomatic mission in Syria was largely expected and priced in.   The well-telegraphed-in-advance Iranian drone attack against Israel may have been peak escalation, for now, analysts and investment banks say. However, uncertainty over a potential Israeli retaliation and whether restraint will prevail continue to keep the oil market on edge. Risk premiums and fear will continue to be priced in Brent Crude for the foreseeable future. Uncertainty and risks have grown in the Middle East – a key oil-producing region, which is also home to the world’s most crucial oil chokepoint, the Strait of Hormuz. About 21 million barrels per day (bpd), or a fifth of the world’s daily consumption, is being transported out of the top Middle Eastern exporters via the Strait of Hormuz.  In case of further escalation, $100 oil is possible, analysts say, especially if this involves direct threats to oil supply. “What is not priced into the current market, in our view, is a potential continuation of a direct conflict between Iran and Israel, which we estimate could see oil prices trade up to +$100/bbl, depending on the nature of the events,” Citigroup in a note, as carried by Bloomberg. The worst-case scenario for oil supply is Iran attempting to disrupt tanker traffic in the Strait of Hormuz, which could send oil prices spiking to $130 per barrel, according to Lipow Oil Associates. “Any attack on oil production or export facilities in Iran would drive the price of Brent crude oil to $100, and the closure of the Strait of Hormuz would lead to prices in the $120 to $130 range,” Andy Lipow, president of Lipow Oil Associates, told CNBC. An escalation involving the U.S. could send oil surging to $140 per barrel, according to Societe Generale, which has raised its Brent price forecast by $10 a barrel to reflect continued geopolitical risk premium. While warning that oil prices could spike well above $100 per barrel in case of a major escalation, investment banks do not consider such escalation the base-case scenario. While Israel is weighing its response to the Iranian attack, the G7 has called for restraint and the U.S. has signaled it wouldn’t be part of any Israel offensive against Iran. U.S. President Joe Biden has assured Israeli Prime Minister Benjamin Netanyahu that the U.S. commitment to defend Israel is “ironclad,” but the U.S. would not participate in an offensive against Iran, a senior administration official has told NBC News.   As of early Tuesday, Israel was still weighing its options. Iran has signaled that with the drone barrage against Israel it considers the matter closed, the permanent mission of Iran to the United Nations said on Sunday, but added that “should the Israeli regime make another mistake, Iran’s response will be considerably more severe. It is a conflict between Iran and the rogue Israeli regime, from which the U.S. MUST STAY AWAY!” In view of calls on Israel for restraint, the “most likely path from here (to be) de-escalation rather than further escalation,” Richard Bronze, co-founder and analyst at Energy Aspects, told CNN. “While Israel’s allies are pushing for a diplomatic response, it appears for now that Israel is considering a more direct response. If this is the case, it unfortunately means that this uncertainty and tension will linger for quite some time, as markets will then focus on how Iran further retaliates,” ING strategists Warren Patterson and Ewa Manthey wrote in a Tuesday note. “Iranian oil output is most at risk and even a strong diplomatic response from Israel’s allies could hit Iranian oil exports significantly with stricter enforcement of oil sanctions,” say the strategists, who see up to 1 million barrels per day (bpd) of Iranian oil off the market in such case. Morningstar sees “more downside risks than upside at the moment,” Stephen Ellis, an energy and utilities strategist for Morningstar, wrote on Monday. “[T]he 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.” Most of the recent rise to $91 oil before the Iranian attack has been the result of geopolitical risks rather than supply risks, according to Morningstar, which notes that the OPEC+ group has ample spare capacity of about 5 million bpd – and probably more – part of which it can return to the market if oil prices surge above $100. “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,” Morningstar’s Ellis said. Iran’s retaliation can now prompt profit taking and prices could be easing, but this is not the end of risk premiums, consultancy FGE said in a note on Monday. Despite pressure from allies on Israel to limit a possible response, further escalation is not entirely off the cards, but FGE says that “Our base case is that the worst has passed.” FGE’s base case is now for OPEC+ to decide to unwind some of the production cuts as of July. Even with another up to 1 million bpd from OPEC+ output back on the market, Brent is still expected to average $90-$95 a barrel in the third quarter with the ongoing political risk, the consultancy said.

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Israel reportedly finalizes plans for counter-strike against Iran

The Israeli military is said to have finalized its strategy for the response to the weekend attack by Iranian forces, people familiar with the matter told The Jerusalem Post on Tuesday. Sources indicate that while the specific timing of the retaliatory action against Iran and its proxies remains undecided, the Israeli Defense Forces (IDF) have agreed on the nature of the response they intend to deliver.Israeli Defense Forces (IDF) spokesperson Daniel Hagari previously stated Iran would not “get off scot-free” following the drone and missile attack its military launched on April 13.