Iran, Israel and Energy Prices

Iran’s massed missile attack targeting Israel on 1st October has driven significant energy market volatility – Brent shot back up to $80/bbl i n a wave of short covering following reports energy infrastructure was at risk as part of a wider Israeli counterstrike, before giving up most of the gains as Israel was said to focus on military targets. Prices have since steadied around $74/bbl, with the market largely settling into a wait and see dynamic. We expect oil prices to fall further if Israel’s response is indeed limited to military targets, with reports indicating Iran will effectively view this round of actions to be closed if Israel avoids striking strategic infrastructure. This would allow the oil market to focus solely on the bearish fundamental 2025 balance which dominated price formation through September. However, we see the market as too hyper-focused on the specific target for this round of tit-for-tat. There are clearly structural changes in the conflict between Israel and Iran, with the conflict effectively now out of the shadows . Given proxy warfare has largely taken place in territories with limited globally relevant energy infrastructure, the expansion of the conflict to include the territory of a major oil exporter has significant implications for energy markets. Admittedly, m ost oil and gas market-relevant scenarios are ultimately quite high up the escalatory ladder, and relatively unrealistic in a base-case scenario (particularly given the ineffectiveness of US sanctions). We particularly view potential Iranian strikes on regional infrastructure as far lower probability than the market, with consensus discounting the regional détente between Saudi and Iran too readily. However, shifts in the conflict mean that events escalate quickly and unpredictably, with the ability for Iran to use proxy theatres as shock absorbers diminished . Facing direct strikes and limited effectiveness of conventional deterrence, Tehran may operate unpredictably and take unprecedented action, with significant impact on energy prices. …