A direct war between Israel and Iran could lead to substantially higher oil prices through 2025, according to Bank of America. Oil could surge by $30 to $40 per barrel if hostilities escalate into a months-long war that impacts energy infrastructure and causes disruptions to Iranian crude supplies, according to the bank. The price of Brent could spike to $130 in the second quarter while U.S. crude oil would soar to $123, they predict. This scenario assumes that Iran’s crude oil production falls by up to 1.5 million barrels per day due to the war. OPEC+ would eventually jump into the breach by releasing barrels, but this would reduce the group’s spare capacity. Brent would eventually settle around $100 in 2025 while U.S. oil would come down to $93. Crude oil prices have fallen for three consecutive trading sessions in the wake of Iran’s weekend missile and drone assault against Israel. U.S. oil is currently trading below $85 while Brent has slipped below $90 a barrel as futures shed the gains made in the runup to the attack. “So far, events over the weekend have left limited casualties and damage thanks to Israel’s protective defensive shield, allowing some of the geopolitical risk premium in the oil market to reverse,” Bank of America’s global economics team told clients in a Tuesday research note. But the analysts warned that the market reaction to the attack “may not reflect the medium-term economic and geopolitical implications” of Iran directly attacking Israel for the first time. Bank of America sees little impact on U.S. economic growth and the Federal Reserve’s monetary policy so long as a war is limited to Israel and Iran. The bank has penciled in the first Fed interest rate cut in December, and oil prices would come down by then though remain elevated. A general regional war, however, could have a substantial impact on the U.S. economy and Fed monetary policy, according to the bank. If the war leads to major oil disruptions outside Iran with the market losing 2 million bpd or more, prices would spike by $50 a barrel. “Should supply losses build up regionally, it may also prove difficult to access spare production capacity, so oil prices would likely settle above $150/bbl for several months,” the bank’s analysts forecast. In this scenario, U.S. economic growth would flatline through the third quarter and come in at an anemic 1% year-over-year in the fourth quarter. The Fed would likely delay interest rate cuts until the second quarter of 2025 or even until the second half of the year. “We do not think the Fed would be able to look through an energy price shock of this magnitude, particularly as inflation expectations are likely to also increase beyond the recent historical range,” the analysts wrote. If the current conflict remains a limited skirmish that does not disrupt energy supplies, the oil market would price in an incremental risk premium of $5 to $10 per barrel with a negligible impact on U.S. economic and monetary policy , according to the bank. “Israel’s response will be key,” the analyst said. “The Israeli war Cabinet decision bears watching.” — CNBC’s Michael Bloom contributed to this report.
