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DBS, OCBC maintains oil forecast of above US$85/bbl and US$90/bbl respectively with upside bias following Gaza conflict

Nicole Lim
Nicole Lim • 4 min read
DBS, OCBC maintains oil forecast of above US$85/bbl and US$90/bbl respectively with upside bias following Gaza conflict
Unless the conflict snowballs to reach a much bigger scale involving multiple parties, DBS believes US$100/bbl levels are unsustainable. Photo: Bloomberg
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The geopolitical premium on oil prices has returned following the breakout of the conflict between Hamas and Israel in Gaza, says DBS in a note dated Oct 10. However, there will be no direct impact to global oil market balance or trade routes immediately. 

As the situation is currently unfolding, DBS is keeping its oil forecasts unchanged, with an upside bias at US$85 a barrel (bbl) levels for now.

Similarly, OCBC has maintained its view for crude oil prices to average US$90/bbl. OCBC notes that unrest and volatility in the near term suggests that upside risks to oil prices will persist. 

Over the weekend, Palestinian militant group Hamas launched a surprise attack on Israel, triggering a declaration of war from Israel and the cutting off of electricity, food, fuel and water to Gaza. This armed escalation has spooked the oil markets, with oil prices up around 4% on Monday, restoring some of the losses seen last week. 

While none of the parties involved in the conflict are oil suppliers and are not material on the demand map, the fundamentals of the oil market should not be affected, according to DBS. In addition, the conflict does not involve any oil trading routes.

However, the DBS analysts note that there “seems to be a firm geopolitical premium” on oil prices currently, therefore close attention should be paid to the risk of conflict escalation and involvement of major players in the oil market. 

See also: SGX calls attention to rubber derivatives amid supply shortage

That said, Iran and Saudi Arabia may have a key stake in the conflict, the former pending proof of involvement and the latter having thawed its ties with Israel. 

“In the near term, we believe volatility would reign supreme, and oil prices will remain choppy, with firm downside support, given the geopolitical risk premium is unlikely to fade for a while,” the DBS analysts note. 

With tight market fundamentals and upside risks related to the conflict, DBS believes Brent crude oil prices will remain above US$85/bbl levels for now. Its forecast for 4Q2023 was US$90/bbl average for Brent. 

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The analysts note that the Israel-Palestine conflict is not new, having occurred multiple times prior without leaving a marked impact on oil prices. Therefore, they think that the US$100/bbl levels are unsustainable unless the conflict snowballs to reach a much bigger scale involving multiple parties. 

Meanwhile, DBS notes that OPEC+ producers have said they were ready to "take additional measures” if required, after the surprise Hamas attack on Israel. The OPEC+ countries remain committed to “their continuing efforts to support market stability”. 

In DBS’s view, this implies that Saudi Arabia might consider restoring some of the voluntary production cuts sooner than expected in case the oil market becomes too overheated, and risk causing demand destruction, especially in Asia. 

“This reaffirms our view that we are unlikely to see a spike in oil prices of the magnitude and duration that would be damaging to the global economy, but we reckon there could be some upside to our forecasts for 2024 and beyond, especially considering the return of the geopolitical premium,” says the analysts. 

As the situation is still evolving, DBS keeps its oil price forecasts unchanged for now, with an upside bias. 

“In case Iran sanctions come back fully, we think oil prices could test US$100/bbl levels without Saudi intervention. In the worst-case scenario of trade routes in the Persian Gulf getting impacted owing to intensification of proxy war in the Middle East, oil prices could spike anywhere, given that about 20% of the world’s oil flows through the Strait of Hormuz, but it could be too early for these doomsday scenarios in our view,” they note. 

As the high-for-long oil prices narrative gets another boost with the re-emergence of a conflict in the middle east, upstream producers in one corner will not be complaining, the analysts say, even as global markets see risk off trades escalate amid another brewing conflict that the world can ill afford. 

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Likewise, OCBC analysts say its base case is that the tensions may remain contained to Gaza and Israel, even if the conflict is protracted in duration. 

“This will lead to some volatility in oil prices during intense periods of conflict but should see prices normalize, following the knee-jerk reaction,” they add. 

As such, OCBC maintains its view for Brent prices to average US$90/bbl in 4Q2023, in anticipation that conflict driven volatility might lead to wide trading range over the next few weeks, with Brent prices likely to climb to US$90/bbl in the near-term.

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