Market Report Week 41 - 08.10.2024

Iran is OPEC's third-largest oil producer after Saudi Arabia and Iraq, with approximately 3.3 mb/d of crude oil produced and exports of around 1.2 mb/d. Iran has a substantial refinery sector with a capacity of 2.4 mb/d but uses almost all of its products domestically. 
If Israel chooses to target the refinery sector, it could force Iran to import products like diesel. If Iran's oil infrastructure is attacked, it could have significant consequences for crude oil prices and product prices. However, Saudi Arabia and the UAE are expected to ramp up production to counteract the effects.
However, the primary concern in the oil market is that Iran might choose to close the Strait of Hormuz. It could affect up to 20% of the global oil market.
 Note that closing the Strait of Hormuz is not our central scenario.

We have not changed our main forecast for Brent. We still expect it to trade in the mid-70s in Q4, edging towards USD 80 in 2025. See our forecast table at the back of the publication.
Our central forecast is based on an improving global economy supported by monetary easing globally and, notably, the expectation that the energy-intensive Chinese economy will receive a boost from the latest easing measures. We see China growing around 5% next year, with the risks tilted to the upside. We expect OPEC+ to add more oil on December 1, but we believe the plan for more oil in 2025 will be delayed and significantly diminished. We also assume that Saudi Arabia will be putting a lot of pressure on quota busters like Iraq, Kazakhstan, and Russia to improve quota adherence and that quota compliance will improve.
This week's geopolitical events imply that for the first time in this Middle East conflict, actual oil production and refinery capacity could be impacted.

Suppose we see an attack on Iranian refineries and oil export facilities in the coming days that removes 75% of Iranian crude oil exports. In that case, we expect an imminent price jump of USD 5-10, as a risk premium already exists. In this scenario, we expect Brent to trade in the mid-80s in Q4. 
Remember, some 0.5 mb/d of Libyan production has been offline over the past few weeks without the market spiking. We also expect the UAE and Saudi Arabia will try adding more oil to the market. The market will likely maintain an elevated risk premium in oil prices due to the heightened risk of further escalation, including the possibility of the Strait of Hormuz being fully or partially closed. An attack impacting refinery capacity could support global cracks, particularly distillate cracks, as Iran might be forced to import oil products. Smuggling from Iran into neighbouring countries could also drop, adding more "official" product demand. 
If Iran decides to close the Strait of Hormuz, we should expect a spike in Brent above USD 100. 
The latter is not our central scenario, but a risk that must be considered in the risk management discussion. 

If Israel abstains from retaliation or conducts a more modest symbolic attack, similar to the one in April, and underscores that it has no intention of going to war with Iran, market nervousness will decrease significantly.
We assume that Brent will temporarily drop back to the low 70s or even lower, and the market will refocus on fundamentals. Oil could see support from improved risk appetite in global markets. After a few weeks, we would likely be back at our central scenario.
Oil volatility is expected to drop significantly.
We recommend using a scenario like this to hedge Q4 and 2025 exposure. The conflict is unpredictable, and a return to a risk scenario should be ruled out later in the year.