At $93/bbl today, Brent oil price is about $7 overvalued vs its estimated fair value—an appropriate premium given the uncertainty. But beyond the short-term spike induced by geopolitics, our base case for oil remains that large inventory draws observed in 3Q23 will transition to a largely balanced market in 4Q23 (our model oscillates between 100 kbd build and 100 kbd draw) with Brent exiting the year at $86. Strange as it might seem, since 1967, with the exception of the Yom Kippur war of 1973, none of the other 10 major military conflicts involving Israel resulted in a lasting impact on oil prices. In contrast, during conflicts involving a major regional oil producer, oil traded at a wide $7-14/bbl premium to its fair value for an extended period. Currently, oil flows have not yet been affected, with limited risk of future supply losses, in our view. All significant parties in the region have powerful incentives to avoid the widening of the war. And so far they have acted accordingly.

 

Speaker:

Natasha Kaneva, Head of Global Commodities Research

 

This podcast was recorded on October 20, 2023. 

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