Global Oil & Gas: Return of Geopolitical Risk
Geopolitical risk returns to the oil market. Following the eruption of armed conflict between Israel and Hamas forces in the Gaza strip, oil prices have been volatile, given the delicate position of ...
Chief Investment Office - Hong Kong8 Nov 2023
  • Oil prices expected to remain choppy in near term with firm downside support around USD85/bbl
  • Escalation in the Middle East conflict poses severe risks to the oil market if it comes to fruition, and is not priced in fully yet
  • Sanctions against Iran or disruption of trade routes along the Persian Gulf could see prices spike beyond USD100/bbl, but such scenarios are unlikely at the moment
  • Despite risks of demand moderation in 2024 from a global economic slowdown and continued voluntary supply cuts by OPEC+ members, possible end of rate hikes cycle and weakening USD are bullish factors to watch out for
  • Oil remains an important global commodity in the context of energy demand and security; oil majors are an important avenue for investors to express this positive outlook on the sector
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Geopolitical risk returns to the oil market. Following the eruption of armed conflict between Israel and Hamas forces in the Gaza strip, oil prices have been volatile, given the delicate position of the conflict close to the oil trading routes in the Middle East theatre. While the conflict has so far not snowballed into a bigger regional issue, the chances of that happening are not entirely zero.

In the near term, we believe oil prices will remain choppy, with firm downside support around USD85/bbl, given the geopolitical risk premium is unlikely to fade for a while. Supply side constraints continue to be a big factor, with both Saudi and Russia remaining committed to their supply cuts. Bullish factors for oil could also emerge from the possibility of a less hawkish stance from the Fed hereon and a weaker US dollar environment.

Upside scenarios possible for oil. As the conflict situation continues to evolve but without widespread escalation a month into hostilities, we keep our base case oil price forecasts (4Q23: USD90/bbl average for Brent, 2024: USD80-85/bbl average for Brent) unchanged, but we concede upside scenarios are possible. Iranian backed players in the region such as Hezbollah in Lebanon could get involved in the coming days, and if the US is able to take a tougher line with implementing sanctions under the Iran nuclear deal, we think oil prices could test the USD100/bbl level, unless there is Saudi intervention in terms of rolling back some of its voluntary production cuts.

In the worst-case scenario of trade routes in the Persian Gulf getting impacted owing to the intensification of a proxy war in the Middle East, we believe oil prices could spike towards USD130/bbl or higher, given that the Strait of Hormuz in the Persian Gulf is a key choke point for oil trade, but it could be too early for these doomsday scenarios in our view.

3Q performance for oil majors mostly stable, 4Q numbers could look better. After taking a breather for much of 1H23, share prices of oil majors have rallied in 2H23 after the combination of supply cuts from Saudi/ Russia and seasonally higher demand saw oil prices benefitting. The Israel-Hamas conflict led to a further spike in performance before some profit taking in recent weeks. 3Q23 results for most of the oil majors have thrown up no big surprises, and oil majors, especially in the US, remain committed to the hydrocarbon business with recent big M&A deals.

Even European oil majors – more advanced in the energy transition roadmap – have taken a step back to review their strategy and ensure their investments in Oil & Gas and cleaner energy sources are well matched, given that energy demand and energy security have come into spotlight in an increasingly fissured world. With average Oil & Gas prices likely higher in 4Q, as well as potentially better Oil & Gas trading and optimisation results given increase in volatility, performance and shareholder returns could surprise on the upside, providing further catalysts.


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