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Welcome to Thoughts on the Market. I'm Martin Ratz, Morgan Stanley's Global commodity strategist. Today I'll talk about oil price dynamics amidst escalating tensions between Israel and Iran. It's Wednesday, June 18th at 3pm in London. Industry watchers with an eye on the Brent forward curve recently noticed a rare smile shape downward sloping in the first couple of months, but then an upward sloping curve later this year and and into 2026. Now that changed last Friday. The oil market creates these various shapes in the forward curve depending on how it sees the supply demand balance. When the forward curve is downward sloping, holding inventory really is quite unattractive. So typically operators release barrels from storage under those conditions. The market creates that structure when the conditions are tight and barrels indeed needs to be released from storage. Now, on the other hand, when the market is oversupplied, oil needs to be put into inventory and the market makes this possible by creating an upward sloping curve. So the curve that existed until only recently told the story of some near term tightness first, but then a substantial surplus later this year and into 2026. Now, when the tensions in the Middle east escalated late last week, the oil complex responded strongly. But not only did the front month rent future, that is Oil for delivery next month rise quite Sharply by about 17%, the impact of the conflict was also felt across all future delivery dates. By now the entire forward curve is downward sloping, which means that the oil market no longer is pricing in any surplus next year, a big change from only a few days ago. Now, no doubt Friday's events have sharply widened the range of possible future oil price paths. However, looking ahead, we would argue that oil prices fall in three main scenarios. Together, they provide a framework to navigate the oil market in the next couple of weeks and months. First, let's consider the most benign scenario. Military conflict does not always correlate with disruptions to oil supply, even in major oil producing regions. So far there is no reduction in supply from the region if oil and gas infrastructure remains out of the crosshairs, and it is entirely possible that that continues, in that case, we might see brand prices retract to around about $60 per barrel, down from the current level of about $76 per barrel. Our second scenario recognizes that Iran's oil exports could be at risk either because of attacks on physical infrastructure or because of sanctions, mirroring the reductions that we saw during 2018's maximum pressure campaign by the United States. If Iran were to lose most of its export capacity, that would broadly offset the surplus that we are currently modeling for the oil market next year, which would then in turn leave a broadly balanced market. Now in a balanced oil market, oil prices are probably in a $75 to $80 per barrel range. The third and most severe scenario encompasses a broad regional disruption, possibly pushing prices as high as 2022 levels of around $120 a barrel. Now that could unfold if Iran targets oil infrastructure across the wider Gulf region, including critical routes like the Strait of Hormuz, through which a significant portion of the world's oil transits. The situation remains very fluid and we could see a wide spectrum of potential oil price outcomes. We believe the most likely scenario remains the first our base case, with supply eventually remaining stable. However, the the probabilities of the more severe disruptions, whilst currently still lower, still justify a risk premium of about $10 per barrel for the foreseeable future. As we monitor these developments, investors should stay alert to signs such as further attacks on oil infrastructure or escalations in sanctions which could signal shifts towards our more severe scenarios. Thanks for listening. If you enjoyed the show, please leave us a review wherever you listen and share thoughts on the market with a friend or colleague today.
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