Three more months of war in Iran could cause Brent crude oil prices to skyrocket, soaring past US$200 a barrel, a report by a global asset management firm warned on Friday.
The ongoing โGulf War 3โ is the key factor in deciding what direction the global economy will head in, the Macquire Group Ltd. said in a note to clients.
The report outlines two scenarios, the first with the war ending at the end of March and the second with the war continuing until the end of June.
In the first scenario, the groupโs analysts expect oil prices to fall quickly, โalbeit to levels still above those seen pre conflict.โ
โIf the war begins to wind down soon, the economic costs will likely be relatively small, with global GDP growth to slow only a little relative to last year. It will take a while for energy markets to rebalance,โ the note says.
The oil shock from the war is โalready bigger than the peak in either of the 1970s oil shocks, or the first two Gulf Wars,โ the note said.
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โWith the Strait of Hormuz mostly closed, we estimate that around 13% of global oil production will be shut in by the end of March,โ it added.
Amid the volatility of ceasefire proposal talks and Iranโs rejection of the U.S. proposal on Wednesday, the price has continued to fluctuate but is hovering around $90 as of this week, with the price breaching $100 on some days.
The global economy may just be able to weather the storm with the 1.2 billion barrels of oil in the strategic reserves of the member countries of the International Energy Agency, which includes Canada, as well as Chinaโs own massive oil reserves, it said.
A prolonged conflict, however, could send oil prices skyrocketing past US$200 a barrel, the report said, adding that it would translate to a price of $US7 per gallon. Currently, the average price of gasoline at U.S. pumps is US$3.9 per gallon.
โIf the Strait were to stay closed for an extended period, prices would need to move high enough to destroy an historically large amount of global oil demand,โ the report added.
If war continues for three more months, โthat would see talk quickly turn to global recession, as the world experiences a substantial market risk off.โ
This warning echoes one made by Iranโs military command, which said earlier this month that the world should be prepared for oil to hit US$200 a barrel, as more ships came under attack in the blockaded Gulf.
While โthe market is still expecting President Trump to soon declare victory,โ the Macquire report said, there is โuncertainty about what victory looks like.โ
Given the recent attacks on energy infrastructure throughout the region, โthere is a risk that prices may need to move significantly higher first to incentivise a near-term deal,โ the report added.
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