Brent Prices Remain Higher for Longer – TD Securities

Brent crude oil’s fair value is estimated at $90-100/bbl once the conflicts involving Iran and the wider Middle East have ended, before the range narrows to $80-90/bbl into H2 2027–2028, according to TD Securities’ Ryan McKay. He argues that Brent is moving into a higher-for-longer pricing regime, supported by enduring risk premia, vulnerable Middle East flows, tight product markets and a recovery in global demand.

Risk premia keep Brent above fair value

"We continue to see medium-term fair value for Brent crude oil in the $90-100/bbl region after the eventual conclusion of the conflict in the Middle East, with that fair value range contracting to $80-90/bbl into H2 2027 and 2028. This is because the market will require one to two years of surpluses to rebuild inventories and buffers to required levels."

"In recent weeks, this risk premium is translating somewhat into a fundamental reality with attacks beginning to weigh on flows, at least on a short-term basis. If flows begin to notably contract for weeks or months at a time again, the fair value estimates for crude move higher, and extreme upside scenarios would once again be in play."

"Without a conclusion to the conflicts in the Middle East and in Russia-Ukraine, a $10-20/bbl risk premium above our fair value remains viable, and we would expect the higher range to last for longer. If flows are notably and sustainably reduced again, either via escalation, IRGC tanker attacks or Houthi attacks on Saudi infrastructure, our view fair value would be at risk of moving significantly higher again."

"Without notable escalation and/or damage to Saudi infrastructure, the impetus for prices to continue moving higher from current levels is limited due to the largely normalized level of crude supply from the Middle East. Because of the improved supply and the elevated risk premium baked into prices, crude will remain extremely prone to diplomacy headlines and any sign of easing tensions. There also remains a risk that sky-high freight rates could cannibalize refiner margins leading to potential refiner run cuts, particularly in North West Europe."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)