The US has assembled a massive force of jet fighters and aircraft support to the Middle East. Negotiations over Iran’s enrichment of uranium haven’t yielded a resolution between the two nations. President Donald Trump indicated he will decide in 10 days whether to begin kinetic strikes against Iran.
Why it matters: Global oil benchmarks have risen significantly since the start of the year. Brent futures now trade at nearly USD 72/bbl, rising nearly 20% since early January. This contradicts nearly universal bearish prognostications for crude prices earlier in the year related to supply glut fears.
- The International Energy Agency forecast a global surplus of 3.7 mmb/d, meaning the market is pricing in a modest geopolitical premium. We speculate it ranges from USD 4 to USD 10/bbl. We think the market is pricing in a high probability of US intervention that’s directionally higher than political pundits.
- We agree with the market’s assessment that the likelihood of US intervention remains highly probable. We think Iran may be trying to extend negotiations as a delay tactic, and Trump’s only become emboldened since the successful capture of Nicolas Maduro.
The bottom line: We maintain our midcycle estimate of USD 65/bbl Brent, which is the primary driver of our long-term producer price deck. Our top picks for US energy remain narrow-moat Devon Energy related to Coterra merger synergies and no-moat Energy Transfer tied to natural gas investments.
- We apply futures pricing to our near-term price deck. We think any potential lift to valuations will be short-lived but could help reduce any E&P valuation discounts. We think pricing benefits remain muted as we view a limited kinetic strike as a base-case scenario.
- Regarding potential intervention, we think a limited US strike on military or nuclear targets is the likeliest outcome, which would mean no impact on global physical flows; so, the global surplus would remain intact. Any price action would be due to the geopolitical premium.
