Brent is on tenterhooks

Brent is on tenterhooks

·         Oil is reacting to the slightest news about the progress of negotiations between the US and Iran.

·         Armed conflict risks pushing Brent above $90 per barrel.

Oil is heading for its best start of the year since 2022. Year to date, Brent prices have risen by 16% and WTI by 15% as investors' attention has shifted from record surpluses to geopolitics. For a long time, bears dominated the market, but the threat of armed conflict in the Middle East and Iran's closure of the Strait of Hormuz have led to a geopolitical risk premium, now estimated at $7-10 per barrel.

If you want peace, prepare for war. Tehran is ready to engage with the US, but only through diplomatic channels. Donald Trump claims that any deal will be better than no deal at all. At the same time, Iran is reportedly accelerating negotiations with China to purchase anti-ship cruise missiles, while the US is increasing its military presence in the Middle East. The Polymarket betting market gives a 62% probability of military strikes before the end of March.

Tehran may respond by blocking the Strait of Hormuz. About 16.5 million barrels per day flow through this oil artery, including about 5 million barrels per day from Saudi Arabia. Supply disruptions are sure to drive up prices and increase transport costs. For example, during the 12-day conflict between Iran and Israel in June last year, the base rate for tankers transporting oil from the Middle East to China rose sharply.

Oil bulls argue that in the event of a serious escalation of the conflict, Brent will soar to $90-100 per barrel. Bears, meanwhile, predict that North Sea crude is unlikely to rise much more, as there are no supply disruptions.  

Traders are on tenterhooks. Historically, peaceful resolution of conflicts has led to a rapid reduction in the geopolitical risk premium. At the same time, Brent risks falling by more than $7-10 per barrel, as the oil market remains bearish. For example, Western restrictions on the purchase of Russian oil have led to discounts on Urals reaching their highest levels since April 2023.

On the contrary, armed confrontation between the US and Iran, followed by Tehran's closure of the Strait of Hormuz, could push Brent prices above $90 per barrel. The binary outcome forces investors to react to the slightest news about the progress of negotiations between Washington and Tehran.

By the FxPro Analyst Team