Another Quick Note on Developments in Iran

Brent futures traded at almost $120 last night on a narrative that Iran’s new Supreme Leader is a hard-liner who will be determined and defiant. No surprise there. At $102 as of this writing, Brent has risen about 70%. The last time an oil shock caused a recession, in the First Gulf War of 1990-1991, Brent rose more than 150%. Then the US was more than twice as dependent on oil to produce a unit of GDP than it is now, and much less oil was domestically sourced. We don’t see this shock on as lasting. 12-month Brent futures, as of this writing, at $72 (not even at the $80 upper range of our price forecast for the year), are pointing to a relaxation of tensions. US insurance and escorts may open the Strait of Hormuz sooner rather than later. And Iran’s ability to destroy oil infrastructure in the region is limited, subject to a complex analysis with unknowable variables about the relative decay-rates of offensive and defensive capabilities. But as we learned from the 2019 Iran-funded Houthi attack on Saudi facilities, which took out 5% of global oil supply, damage can be quickly repaired.