Oil Bears Are Dangerously Underestimating Geopolitical Risk

Core Viewpoint - The perception that oil markets are insulated from geopolitical tensions due to U.S. shale production is misleading, as geopolitical events can still significantly impact oil prices [1]. Group 1: Oil Price Movements - The recent rally in oil prices was driven by the threat of military escalation between the U.S. and Iran, with Brent crude surpassing $67 per barrel and WTI exceeding $62 [2]. - A military conflict with Iran could lead to a significant price increase, although Rystad Energy suggests that even in worst-case scenarios, oil prices may only rise by $10 to $15 per barrel [4]. Group 2: Scenarios for U.S.-Iran Relations - Rystad Energy outlined five scenarios regarding U.S.-Iran relations, with the most optimistic involving a new nuclear deal that would increase Iran's oil production, while the other scenarios are increasingly bullish, including limited to extensive military strikes [3]. - The potential for a price shock exists if Iran were to close the Strait of Hormuz, affecting 20% of global oil supply and potentially leading to an 80% price increase based on historical data [5]. Group 3: Energy Efficiency and Market Dynamics - Energy efficiency improvements have reduced the amount of oil needed to produce one unit of GDP in the U.S. by about 25% since 2011, indicating a shift in oil demand dynamics [6]. - Despite crude oil remaining the primary energy source globally, the impact of price shocks is less severe than in previous decades due to inflation, which diminishes the purchasing power of oil prices [6].