Oil prices rush to $150, the European Central Bank may be forced to raise interest rates! The investment bank deduced three possible scenarios for the Iran-Israel conflict

Following Iran's first direct attack on Israel on April 13, explosions were heard in many places in Iran in the early morning of Friday, April 19, and the situation in the Middle East escalated sharply, once again disrupting the crude oil market, which was already suffering from geopolitical risks. International oil prices rose above $90 per barrel. As of press time, Brent oil gave up its previous gains, falling back from the 90 mark to $87.28 a barrel, which seems to have priced in the risk premium of geopolitical conflicts.

But any further retaliatory strikes could increase tensions and uncertainty in the Middle East, potentially driving higher oil prices. On April 16, Bank of America Merrill Lynch analyst Jean-Michel Saliba's team released a research report, focusing on the analysis of the outlook for energy prices under geopolitical risks, discussing three possible scenarios of the Iran-Israel conflict and their impact on energy prices: a limited conflict will not lead to energy supply disruptions, a war between the two sides may cause a temporary spike in oil prices of $30-40, and a long-term regional war will push oil prices up to $150 for several months. Geopolitical tensions in the Middle East are a tail risk to the global economy, the report said. Geopolitically triggered spikes in commodity and freight costs can be one of the most challenging exogenous shocks to markets, as they can bring inflationary or even stagflationary effects.

Three Possible Scenarios for Energy PricesIn response to the current situation in the Middle East, Bank of America Merrill Lynch has listed three potential scenarios for Iran-Israel conflict in the coming months and their impact on oil prices:

(1) Limited conflict scenario: It means that Israel has no next retaliatory action or the retaliatory action fails, and Iran and Israel continue to have limited military confrontation, which is not expected to cause disruption to energy supply, and oil prices may remain in the range of $80-100 per barrel for a long time.

(2) Direct conflict scenario: refers to a direct war between Iran and Israel that lasts for several months, eventually leading to a large-scale disruption of Iran's oil supply. The war is expected to trigger a spike in oil prices of $30-40, Iran's crude oil production will eventually fall by 1 million to 1.5 million barrels per day, and oil prices will eventually stabilize at around $100-130 per barrel.

(3) Regional war scenario: refers to the war between Iran and Israel and triggering a long-term regional war, which will not only lead to a large-scale disruption of Iran's oil supply, but may also lead to the interruption of energy supply in other parts of the Middle East. Oil prices are expected to fall by more than $2 million per day in the global crude oil market, pushing oil prices up by $50 to $150 per barrel.

Specifically, under a limited conflict scenario, Bank of America Merrill Lynch expects oil prices to stabilize overall, possibly recovering an incremental risk premium of about $5-$10/bbl. Until a permanent ceasefire agreement is reached in Gaza, oil prices are expected to remain in the $80-$100 range for an extended period of time, and the European benchmark Dutch TTF gas price is likely to remain in the range of €25-40/MWh.

The report notes that if there are no more attacks on the infrastructure of oil production, then the geopolitical premium in the oil options market may fade.

In this scenario, oil prices may not remain above $100 per barrel for long, as the market will focus on the oil oversupply that may arrive in 2025, but will not fall to around $80 per barrel until the risk of geopolitical conflict is completely gone.

In a direct conflict scenario, a direct war between Iran and Israel could lead to a $30-40 spike in oil prices, which would affect energy infrastructure for months as the conflict between the two countries escalates, resulting in severe disruptions to Iran's oil supply. OPEC+ will increase production to offset some of Iran's production cuts, but overall oil production capacity will decline sharply, with eventually oil prices stabilizing around $100-130/barrel and European TTF gas prices jumping to a new range of €35-60/MWh, the report said.

The months-long Iran-Israel war could quickly lead to a massive disruption of Iran's oil supplies.

Under this scenario, Iran's crude oil production is expected to fall by 1 million to 1.5 million barrels per day, and the global oil market will face a large supply and demand deficit.

In a regional war scenario, oil supplies from the rest of the Middle East, including Iran, would be significantly disrupted due to damaged infrastructure and poor access to the straits, ultimately reducing global oil production by 2 million barrels per day or more, and pushing oil prices up by $50 to $150 per barrel. According to the report, this worst-case scenario would accelerate the global recession and eventually put downward pressure on cloth oil prices in 2025. In addition, liquefied natural gas (LNG) exports from the Persian Gulf region could be disrupted, with TTF gas likely to be briefly pushed above €200/MWh and eventually fall in the €100-150/MWh range. The above are the impact of three possible scenarios on energy prices. In addition, the report specifically forecasts the quarterly price movements of Brent and WTI crude oil and TTF natural gas under three scenarios from 2024 to 2025:

Limited conflict scenario: Brent oil prices are expected to be $82/b in the first quarter of 2024, gradually decreasing to $78/b throughout 2024 before rising slightly to $84/b in 2025.

WTI oil prices are similar to cloth oil prices, but start slightly lower and are expected to be $77/b in the first quarter of 2024.

Direct conflict scenario: Brent oil prices are expected to rise significantly to $130/b in Q2 2024, then fall to $110/b in Q4 2024 and fall further in 2025.

WTI oil prices are expected to be $123/b in the second quarter of 2024 and will follow a similar trend thereafter to cloth oil.

Regional war scenario: Oil prices are expected to soar to $190/b in Q2 2024, then fall to $155/b in Q4 2024 and fall further in 2025.

WTI oil prices are expected to be $180/b in the second quarter of 2024, after which the price movement will be similar to that of cloth oil.

The report concludes with a look at the cross-regional implications of tensions in the Middle East, particularly the impact of energy price shocks and geopolitical risks on central bank policy. Bank of America Merrill Lynch noted that it is "unlikely" that the world's major central banks will choose to raise interest rates in a medium-risk scenario, but the current situation seems to be more inclined to evolve into a "long-term high risk". In the United States, although the country's energy dependence is relatively light, the report predicts that if the third type of "regional war" scenario occurs, its negative effects will still drag down the US economic growth, and the Fed is expected to "hold its ground" for a longer period of time, and interest rate cuts may be postponed until the second quarter of 2025 or even the second half of 2025. The report also said that while rate cuts may be delayed, there is also "no need" for the Fed to raise rates:

We still don't think the Fed will raise rates because as economic activity slows, the Fed will become more confident that weaker global demand will bring energy prices back.

In fact, in this scenario, headline US inflation could fall below target by mid-2025 (due to the base effect of energy prices), which would also support a rate cut.

Bank of America Merrill Lynch noted that since Europe is more sensitive to oil prices and inflation, the ECB is most likely to act first if the risk evolves into a worst-case scenario. Specifically:

Limited conflict scenario: Eurozone inflation is expected to rise in the near term, but it is unlikely to affect the base case for the ECB's three quarterly rate cuts this year.

In a direct conflict scenario: the terms of trade in the eurozone will suffer a huge shock, and the headline inflation rate may rise to close to 6% in the summer, and the ECB is expected to at least "hold its ground" and may consider further interest rate hikes.

Regional war scenario: The 2022 gas price shock will be repeated, headline inflation will return to double digits and a real recession, and the ECB may have to raise interest rates again in the second half of the year. But from the beginning of 2025, interest rates will have to be cut "very quickly, very much", by as much as 100 basis points within the year.

In the worst-case scenario, a new energy shock triggered by geopolitical risks could force discussions about joint funding for the EU, the report adds. ⭐ Star Wall Street news, good content do not miss ⭐ This article does not constitute personal investment advice, does not represent the views of the platform, the market is risky, investment needs to be cautious, please make independent judgment and decision-making.