The Extreme Case for Oil Price

The recent conflict between Israel and Hamas greatly increases the likelihood for much higher oil prices but how high will prices go?

So far, most analysts are cautious because there is so much uncertainty. Ole Hansen noted a few days ago that

“No one in the right frame of mind would hold a short position [in oil] when Israel has just ordered 1 million people to leave [northern] Gaza. That threatens a massive escalation.”

Rabobank’s Joe DeLaura went a bit further saying that

“We’re headed to $100 [a barrel] no matter what this quarter.”

My own view is consistent with what Hansen and De Laura have suggested but more extreme.

I see little chance that the conflict in Israel does not involve Iran if only indirectly through its Hezbollah proxy. So far, there seems to be insufficient evidence to link Iran directly to last weekend’s Hamas attack on Israel. At the same time, it’s hard to imagine how Hamas could have trained glider pilots inside Gaza without Israeli and U.S. notice. In fact, the entire narrative that Israel simply missed the lead-up to the Hamas invasion stretches credibility.

Iran has already indicated that it will have to intervene if the Israeli operation in Gaza continues. I see almost no scenario in which Israel does not move into Gaza unless the U.S. prevents it. Play that forward and a major offensive by Hezbollah in Lebanon is nearly certain. Speculation beyond those hypotheses is pointless but should be more than enough to push oil prices above $100 per barrel.

Unless a detente is quickly arranged, oil prices could potentially retrace the early 2022 rally toward $120 per barrel (Figure 1).

The political and economic implications of this scenario coupled with the existing war in Ukraine look dire indeed. If you think what I’ve described is extreme, I hope that you are right.