Oil: 2020 Spells Geopolitics For Energy

Norbert Rücker (Julius Baer) |  The oil market is off to a rocky start as the tensions between the United States and Iran escalate. The situation brings lots of uncertainty and geopolitical tea-leaf reading on reactions. While the closure of the Strait of Hormuz remains a very unlikely event, the deterioration in Iraq bears supply risks. Geopolitics tend to be a temporary force on oil markets and we believe this time is no different. We raise our near-term forecast to USD 65 per barrel, and maintain a Neutral view on oil.

The oil market has anything but a soft start into the new year. The US killing of Iran’s general Soleimani in Iraq triggered geopolitical tremors, which resonate far beyond the oil market itself. The attack represents a severe escalation of the tensions, brings lots of uncertainty and triggers geopolitical tea-leaf reading on possible reactions and retaliations. Within this, only a few signposts stick out. The Iranian regime is quite rational and strategic.

The costs of direct military confrontation are prohibitive, and disrupting oil flows would alienate loose allies such as China. The closure of the Strait of Hormuz, a key chokepoint of global oil flows, remains a very unlikely event. Meanwhile, the situation in Iraq incrementally turns chaotic, with foreign interferences bubbling and public unrest rising. The country’s oil production is increasingly at risk of disruptions and temporary decline, not least as foreign staff withdraws. Geopolitical events such as last week’s attack tend to have only a short-term influence on prices and we do not believe that this escalation is much different.

Nevertheless, given the supply risks in Iraq and the bullish oil market mood, we believe oil prices remain somewhat elevated compared to late last year’s levels and we lift our three-month Brent forecast accordingly to USD 65 per barrel. In the very near term, even more upside is in the cards, as uncertainty fuels supply fears. Today’s prices provide a welcome breather to the battered US shale business. Looking further ahead into the year, rising supplies from Canada to the North Sea and soft demand should keep the oil market in balance and prices in check.