Our Long-Term Oil Price Is Unchanged Following US-Israeli Strikes in Iran
Morningstar’s update on select US stocks from the Energy sector.
On Feb. 28, the US and Israel launched strikes on Iran with the goal of regime change. Brent benchmark oil prices had risen over 7% by March 2 morning trading.
Why it matters: We don’t think current oil price volatility will affect long-term oil prices. In fact, we think the reaction stems from changes to the geopolitical premium, namely trading markets pricing in the immediate loss of volumes from Ras Tanura, Saudi Arabia’s biggest oil refinery.
- Saudi Aramco halted operations at Ras Tanura following an Iranian drone strike there. We continue to believe that “sell the news” is a base-case scenario, particularly as markets remain well supplied. We also believe a limited strike that mostly avoids Iranian oil infrastructure remains a base case.
- As for a prolonged Strait of Hormuz closure, we still believe this probability is low. What we’re referring to is not a commercial halt, but a sustained, strategic military blockade by Iran. The Strait remains physically open, but logistics have stalled over insurance.
The bottom line: While the US administration has said that the conflict could last for weeks, we’re not changing our $65/barrel Brent midcycle oil price. We think a plausible base case is that futures will remain elevated relative to our midcycle price but still trend downward.
- OPEC+ actions created a massive surplus last year that in some sense insulates the usual supply shock we’d possibly see. For our midcycle price to change, we’d have to see an extended removal of Iran-related volumes for a prolonged period.
- A complete loss of Iran’s 3.3 million barrels a day of production doesn’t strike us as grounded in realism. Just over half of that figure goes toward domestic consumption, so exports of at most 1.5 mmb/d lost likely aren’t enough to meaningfully alter the base-case global calculus for now.
Long view: We’d anchor our recommendations on our long-term views. Stocks like Energy Transfer and Devon Energy remain some of our favorite ideas.
Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
United States