Podcast Summary: Thoughts on the Market – "How Oil Could Price Amid Mideast Tensions"

Release Date: June 18, 2025
Host: Martin Ratz, Morgan Stanley's Global Commodity Strategist

Introduction

In this insightful episode of Thoughts on the Market, Martin Ratz delves into the intricate dynamics of oil pricing against the backdrop of escalating tensions between Israel and Iran. Released on June 18, 2025, the episode offers a comprehensive analysis of recent market shifts, forward curve adjustments, and potential future scenarios that could shape oil prices in the coming months and years.

Current Oil Market Dynamics

Ratz begins by examining the current state of the oil market, particularly focusing on the Brent forward curve—a crucial indicator that reflects market expectations about future oil prices. He notes a significant shift observed just last Friday:

"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." (03:00)

Previously, the forward curve exhibited a rare smile shape—downward sloping in the near term, indicating tight supply, and upward sloping for later months, suggesting a surplus. This structure implied that while immediate supply was constrained, a substantial abundance was anticipated moving into 2026.

Impact of Mideast Tensions on Oil Prices

The episode centers around the recent escalation of tensions in the Middle East, particularly between Israel and Iran, and their immediate impact on oil prices. Ratz explains how these geopolitical developments have altered market perceptions:

"When the tensions in the Middle East escalated late last week, the oil complex responded strongly. Not only did the front month Brent future rise quite sharply by about 17%, but the impact of the conflict was also felt across all future delivery dates." (02:15)

This swift reaction resulted in the entire forward curve shifting to a downward slope, indicating that the market no longer expects a surplus in the near future. The heightened anxiety among investors has sharply widened the range of possible future oil price paths, introducing greater uncertainty into the market.

Future Oil Price Scenarios

Ratz lays out three primary scenarios that could dictate the trajectory of oil prices amid the ongoing tensions:

1. Benign Scenario: Stable Supply Amid Conflict

   In this most optimistic outlook, military conflicts do not disrupt oil supply chains, even in major producing regions. If oil and gas infrastructure remains secure, prices could retract to around $60 per barrel, a significant decrease from the current level of approximately $76 per barrel.

   "We might see brand prices retract to around about $60 per barrel, down from the current level of about $76 per barrel." (01:10)

2. Moderate Scenario: Iran's Export Capacity at Risk

   This scenario considers the possibility of Iran's oil exports being compromised, either through direct attacks on infrastructure or intensified sanctions akin to the 2018 maximum pressure campaign by the United States. A substantial reduction in Iran's export capacity could neutralize the anticipated surplus, leading to a balanced market with prices between $75 and $80 per barrel.

   "In a balanced oil market, oil prices are probably in a $75 to $80 per barrel range." (02:45)

3. Severe Scenario: Broad Regional Disruption

   The most dire outcome involves widespread disruption across the Gulf region, including critical transit routes like the Strait of Hormuz, through which a significant portion of the world's oil passes. Such instability could drive prices up to $120 per barrel, reminiscent of the peaks seen in 2022.

   "Prices as high as 2022 levels of around $120 a barrel" (03:30)

Market Outlook and Investment Implications

Despite the range of potential outcomes, Ratz maintains that the most likely scenario aligns with the benign outlook, assuming that supply remains stable:

"We believe the most likely scenario remains the first our base case, with supply eventually remaining stable." (04:00)

However, acknowledging the lingering risks associated with heightened tensions, he advises incorporating a risk premium of about $10 per barrel to account for the possibility of more severe disruptions.

"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." (04:00)

Ratz emphasizes the importance for investors to remain vigilant, monitoring indicators such as further attacks on oil infrastructure or escalations in sanctions, which could signal a shift toward the more severe scenarios outlined.

Conclusion

Martin Ratz's analysis provides a nuanced framework for understanding the current and future state of the oil market amidst geopolitical tensions. By outlining clear scenarios and emphasizing the most probable outcomes, the episode equips listeners with valuable insights to navigate the complexities of oil pricing in uncertain times.

For those interested in gaining a deeper understanding of market dynamics and strategic investment considerations, this episode of Thoughts on the Market offers essential perspectives from Morgan Stanley’s seasoned experts.