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4 months ago
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Key Takeaways
- Oil could climb to $120-130 a barrel if the conflict between Israel and Iran, which the U.S. entered over the weekend with a strike on Iranian nuclear facilities, were to disrupt oil production and transport in the Middle East, some analysts say.
- Oil prices slumped Monday after Iran launched missiles at a U.S. military base in Qatar, retaliation that investors may have considered restrained.
- Morgan Stanley analysts on Sunday said higher oil prices were unlikely to have a profound impact on U.S. inflation, and instead suggested it could encourage the Federal Reserve to cut interest rates this year.
The U.S. attack on Iranian nuclear facilities Saturday night has raised the risk that oil prices surge into the triple digits. Experts say that’s a remote possibility.
Oil markets are pricing in “a one-in-five chance of a material disruption in Gulf energy production flows,” wrote JPMorgan commodities analysts Monday. In JPMorgan’s worst-case scenario, a widening of the conflict would disrupt transit in the Strait of Hormuz, through which about one-fifth of the world’s oil flows. That, they wrote, could push crude prices to reach the $120-$130 per barrel range.
Whether that scenario is realized will depend largely on how far Iran goes in retaliation for the U.S. strikes. Tehran on Monday launched missiles at a U.S. military base in Qatar, a replay of the largely symbolic retaliation undertaken in 2020 after the U.S. assassinated a top Iranian military leader. Oil prices slumped on Monday as investors bet the strike signaled Tehran's desire to avoid a larger conflict.
Further U.S. retaliation could prompt Iran to hit back economically by attempting to close the Strait of Hormuz. But most experts agree Iran would pay a hefty price for doing so, since it’s a major exporter and China, at 25%, is the largest recipient of the oil that travels the waterway. Polymarket put the odds that Iran closes the Strait of Hormuz this month at about 12% after Monday's attack, down from 25% earlier in the day and well below a better-than-50% forecast Sunday.
Goldman Sachs analysts on Sunday estimated prices would peak at about $110 per barrel if flows through the Strait of Hormuz were halved for a month and remained down 10% for the next year. A more limited supply shock, in which the strait remains open but a substantial portion of Iran’s oil is removed from the market by damage to infrastructure or tightened sanctions, could push oil to $90 a barrel before retreating to its pre-conflict levels in 2026, according to Goldman.
Oil prices haven’t topped $100 since 2022, when Russia’s invasion of Ukraine sent prices soaring. That shock ultimately exacerbated already high inflation in the U.S., an outcome that some fear could play out again with other inflationary pressures, like tariffs, looming. Ryan Sweet, chief U.S. economist at Oxford Economics, last week estimated that every $10 increase in the price of oil would translate into a half-percentage-point jump in the headline inflation rate.
Morgan Stanley analysts in a Sunday note figured that higher oil prices were unlikely to have a profound impact on inflation or the Federal Reserve's interest rate decisions.
“History suggests that a 10% permanent increase in oil prices moves core inflation by only a couple of basis points, an amount that easily gets lost in the noise,” the analysts wrote. (Core inflation excludes energy prices, and thus reflects only the second-order effects of higher oil prices.)
The analysts acknowledged that more expensive oil would have economic repercussions, including weaker consumer spending and slower growth, though those effects could offset inflationary pressures and give the Fed more reason to cut interest rates this year.
"Higher oil prices feel inflationary," the analysts wrote, "but they could ultimately mean downside risk for the Fed."
