Barclays analyst on how risk is being priced into oil markets during the U.S.-Iran war

Core Viewpoint - The narrowing spread between West Texas Intermediate (WTI) and Brent crude oil prices is influenced by shipping costs and potential U.S. export restrictions, with current market pricing reflecting a balance between optimistic and more cautious scenarios regarding trade normalization [1][2][5]. Group 1: WTI and Brent Spread Analysis - The WTI-Brent spread consists of two components: the onshore cost from Cushing, Oklahoma to Houston, and the offshore cost from Houston to the UK [2]. - Recent increases in shipping costs have widened the offshore leg of the spread, while market speculation about U.S. export restrictions has contributed to the widening of the onshore spread [2][3]. - The average onshore spread was approximately one dollar last year, indicating potential for further widening if export restrictions are implemented [3][4]. Group 2: Scenarios for Brent Pricing - Three scenarios have been outlined for Brent pricing: 1. Normalization by early April leading to an average Brent price of $85 [4]. 2. Normalization by the end of April resulting in an average of $100 [5]. 3. Normalization by the end of May with an average of $110 [5]. - Current market pricing is situated between the first two scenarios, indicating a cautious optimism [5]. Group 3: Geopolitical Risks and Market Impact - Elevated rhetoric regarding U.S. control of Iranian oil and threats from Iran could impact oil prices, although the immediate effects on oil infrastructure have been limited [7][8]. - The ongoing conflict and damage to facilities, such as those in Qatar, may lead to sustained disruptions in the LNG market, affecting the power sector in Asia [9][10].