Oil Market Update - Persistent Premium

The conflict between Iran and Israel has continued to escalate over the weekend, with Israel expanding the scope of strikes from nuclear and military to economic assets across a wider geographic scope, with several energy facilities (serving the domestic market) attacked. As of Monday afternoon (16/06), reports indicate Iran has signalled it is seeking de-escalation as well as talks with the US and Israel to end hostilities. However, we would highlight that Israel’s stated intent is to severely disrupt or destroy Iran’s nuclear and ballistic missile capabilities, and the operation has clearly been planned extensively, with preparations several years in advance. Whilst Israel has successfully attacked some facilities and eliminated scientists with specific knowledge on nuclear weaponisation, other facilities remain undamaged and operational, most notably Fordow. Perceived nuclear risk therefore remains, whilst Israel’s campaign has expanded to a much longer of targets. Mission creep and the still open nuclear question may well suggest that Israel will continue its campaign despite de-escalatory Iranian signals. Continued steps up the escalatory ladder with no clear Israeli diplomatic offramps would maintain and exacerbate the market’s risk perception towards energy assets. Indeed, unlike the Apr-24 and Oct-24 Iran-Israel clashes (where fading the initial spike was the correct trade), we expect the geopolitical risk premium built since Thursday’s session (12/06) to persist until clear signs of de-escalation are signalled from Israel.