US Strike on Iran? Probable, but Likely Limited Scope with No Lasting Effects on Oil Price

The United States has assembled a massive force of jet fighters and aircraft support in the Middle East. Negotiations over Iran’s enrichment of uranium haven’t yielded a resolution. US President Donald Trump indicated he will decide in 10 days whether to begin strikes against Iran.

Why it matters: Global oil benchmarks have risen significantly since the start of the year. Brent futures now trade at nearly $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 $4/bbl to $10/bbl. We think the market is pricing in a higher probability of US intervention than political pundits are.
• We agree with the market’s assessment that a US intervention remains highly probable. We think Iran may be trying to extend negotiations as a delaying tactic, and Trump’s only been emboldened by the successful capture of Venezuelan President Nicolas Maduro.

The bottom line: We maintain our midcycle estimate of $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.
• We think a limited US strike on military or nuclear targets is the likeliest outcome, which would mean no impact on global physical flows and the global surplus remaining intact. Any price action would be due to the geopolitical premium.