ING’s Warren Patterson and Ewa Manthey note that Oil prices have surged as markets focus on potential US military action against Iran and associated risks to Persian Gulf supply. They highlight that ICE Brent is in backwardation through 2027 despite their balance sheet showing a surplus, implying sanctions and buyer reluctance to take Russian barrels are tightening actual market conditions.

Middle East tensions tighten Brent outlook

"Oil prices surged higher yesterday, with the market increasingly worried about the potential for imminent US action against Iran. ICE Brent rallied 4.35% to settle above $70/bbl. This strength continued in early morning trading today."

"With a deal looking increasingly difficult to reach, it also means it will be more challenging to find a route to de-escalation, especially following the US military build-up we have seen in the region. And if de-escalation is not possible, the key question will then be what type of action the US takes and how Iran responds to this."

"For oil markets, the concern is clearly what action would mean not only for Iranian oil supply, but also broader Persian Gulf oil flows, given the risk of disruption to shipments through the Strait of Hormuz. Iran exports roughly 1.5m b/d of crude oil, and total oil flows through the Strait of Hormuz are around 20m b/d, which includes refined products."

"As for oil fundamentals, the shape of the ICE Brent forward curve continues to suggest that the market is tighter than what many analysts have been expecting, including us. The forward curve is in backwardation through 2026 and 2027. And while geopolitical uncertainty can provide some support to the front end of the curve, it’s more difficult to use this to justify the backwardation seen all the way through to the end of 2027 and into early 2028."

"Our balance sheet shows a significant surplus through the first half of this year, which should be putting pressure on nearby contracts. However, with a large amount of oil supply sanctioned and the growing unwillingness of some buyers to take this sanctioned oil (Indian refiners increasingly reluctant to buy Russian oil), the market in reality is tighter than what many balance sheets are showing."

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