Analysis of Four Scenarios in the Crude Oil Market Under the Iran Situation

作者：See Wei Zhi Zhuo Miscellaneous

U.S.-Iran tensions flare again, pushing crude oil and precious metals assets higher. Recent oil price increases mainly reflect geopolitical risk premiums rather than actual tightness in spot supply.

Market signals are diverging: futures prices, freight rates, and risk reversal options are rising due to risk concerns, while the spread between near-term and longer-term futures (calendar spreads) and physical crude oil differentials—reflecting current supply and demand—are weakening. MS analyzes four potential scenarios.

Scenario Analysis

· Base Scenario: Excludes the possibility of the Strait of Hormuz remaining permanently closed as a core scenario; the threshold is very high, and the probability is very low. The analysis focuses on possibilities from de-escalation to limited friction.

· Scenario 1 (No supply disruption): Tensions ease, risk premiums dissipate. An estimated $7-9 per barrel risk premium will quickly fade, and Brent prices could fall back to the mid-60s.

· Scenario 2 (Limited strikes and short-term logistical friction): Targeted military actions occur but avoid energy infrastructure. Possible disruptions of 0-0.5 million barrels/day for 1-3 weeks. Oil prices may temporarily spike to the mid-70s, but China’s slowing strategic reserve buildup will be a key balancing factor, with prices then returning to the low-60s.

· Scenario 3 (Partial Iranian export interruption): Broader strikes cause localized disruptions in Iran’s export chain but do not impact shipping through the Strait of Hormuz. Potential disruptions of 0.8-1.5 million barrels/day for 4-10 weeks. Price movements would be between Scenarios 2 and 4.

· Scenario 4 (Fleet efficiency shocks and shipping damage): Tail risk. Iran retaliates via harassment and other maritime measures, reducing shipping efficiency and causing delays. Equivalent to a 2-3 million barrels/day effective supply tightening over several weeks. Prices could spike similar to early 2022 but with a shorter duration.

· Scenario 1 (No supply disruption): Tensions ease, risk premiums fade. The $7-9 per barrel risk premium is expected to quickly disappear, and Brent could fall back to the mid-60s. (Likely)

Scenario 1, “No supply disruption: de-escalation and risk premium decline,” is set as a plausible baseline. The core assumption is that current U.S. military deployments and diplomatic pressure in the Middle East are sufficient to prompt Iran to negotiate on nuclear issues, avoiding direct conflict. Military threats serve mainly as leverage rather than prelude to actual action; sanctions remain strict but do not impose additional restrictions on Iran’s current exports.

Thus, physical crude supply remains largely unaffected: Iran’s exports stay near recent levels, and regional shipping through the Strait remains unobstructed. The main market impact is the unwinding of the geopolitical risk premium embedded in front-month prices. Regression analysis of OECD commercial inventories and Brent calendar spreads (M1-M4) over the past 25+ years indicates current inventories should correspond to a market structure in contango or slight premium, not backwardation. Currently, Brent M1-M4 spreads are about $1.75/ barrel; if markets realize no physical disruption will occur, this spread could revert toward zero, aligning with regression estimates.

This implies that if the front of the futures curve shifts to a positive spread and longer-term prices remain stable, the spot Brent price could decline from around $70 to the mid-60s. Accordingly, about $7-9 per barrel of geopolitical risk premium could dissipate rapidly in a de-escalation scenario. Most price adjustments would occur over days or weeks, not months, especially if market participants are confident regional supply and transportation will remain uninterrupted.

Historical precedent from June 2025, after Iran-Israel conflict fears, shows that oil prices surged on escalation concerns but quickly retreated to pre-conflict levels within weeks once infrastructure and shipping were confirmed unaffected. This underscores that when physical supply is intact, risk premiums can form and dissipate swiftly. Ultimately, volatility compresses, and market pricing shifts from geopolitical risk back to fundamentals of supply and demand.

· Scenario 2 (Limited strikes and short-term logistical friction): Significant likelihood. Disruptions of 0-0.5 million barrels/day for 1-3 weeks. Brent may temporarily rise to the mid-70s, then revert to the low-60s. China’s slowing strategic reserve buildup is a key balancing factor.

This scenario assumes the U.S. conducts targeted military strikes avoiding energy infrastructure, with Iran responding in a calibrated manner to deter escalation but not trigger broader conflict. Regional actors avoid direct involvement, and shipping through the Strait continues without sustained interruption.

Any physical supply impact would mainly stem from minor logistical frictions—such as cautious shipping, delays, temporary insurance hikes, tighter sanctions enforcement, and trader self-limiting behaviors. The estimated impact is moderate, around 0-50,000 barrels/day, temporary, lasting 1-3 weeks. There is even a possibility that regional strikes do not translate into sustained export losses, as in June 2025.

In this case, Saudi and UAE spare capacity could offset such temporary disruptions, limiting long-term physical imbalance. The initial market reaction would likely focus on the front end: Brent prices could spike to $75-80, with wider spreads (M1-M4). But demand-side adjustments—particularly inventory behavior—would be the key balancing mechanism. Over the past six months, China’s implied crude inventory accumulation averaged about 0.8 million barrels/day. In a high-price environment with deepening backwardation, China’s strategic reserve buildup may slow.

When prices reach the mid-70s, inventory accumulation may slow from recent high levels (e.g., to about 0.3 million barrels/day), enough to offset a 0.5 million barrels/day temporary Iranian export interruption.

Market response would be “front-loaded”: prices spike initially due to risk premiums, but as logistical frictions ease, OPEC spare capacity reassures the market, and China’s inventory demand slows, futures curves and prices would compress again, returning toward the mid-60s. This normalization could take longer than Scenario 1—weeks to months—but without sustained physical supply loss, prices would not remain elevated long-term.

· Scenario 3 (Partial Iranian export disruption): Broader strikes causing localized disruptions but no shipping damage. Low probability. Disruptions of 0.8-1.5 million barrels/day for 4-10 weeks. Price movement between Scenarios 2 and 4.

In this scenario, the U.S. launches broader military operations targeting wider Iranian assets, but regional actors avoid direct involvement, and shipping through the Strait remains unaffected (no sustained escort or systemic shipping impact). Infrastructure is not the primary target, but the scale causes localized, substantial disruptions in Iran’s export chain.

Operational impacts include intermittent loading at key terminals, temporary power or communication outages, and short-term logistical constraints from oil fields to terminals. Sanctions tightening and self-limiting trade behaviors may keep exports below normal even after hostilities subside.

The likely outcome: a significant, sustained decline in Iranian exports—greater than Scenario 2, lasting 4-10 weeks—depending on operational disruptions and recovery speed.

Market reaction would mainly be front-end: spot spreads would widen and sustain longer, reflecting more persistent physical tightness. But since shipping remains unaffected, the risk of the severe mismatch described in Scenario 4 is lower.

The balancing channels would be more demand-driven: higher prices and steeper backwardation would suppress autonomous inventory accumulation (especially in China), providing additional buffer. As evidence accumulates that disruptions are operational and reversible, futures curves would begin to normalize. But the longer duration of disruptions would slow the price normalization process compared to Scenario 2.

· Scenario 4 (Fleet efficiency shocks and shipping damage): Tail risk. Iran retaliates via maritime harassment, reducing shipping efficiency and increasing delays. Equivalent to a 2-3 million barrels/day effective supply tightening over weeks. Prices could spike similar to early 2022 but with shorter duration. (Tail risk)

This scenario, “Fleet efficiency shocks: maritime leverage and shipping damage,” is a very low-probability but potentially high-impact tail event. It assumes a large-scale U.S. strike prompts Iran to retaliate with maritime measures—such as repeated fast-boat harassment, selective tanker seizures, drone overflights, missile demonstrations—aimed at increasing navigation risk and uncertainty. Commercial shipping would continue but at reduced speeds, with higher insurance premiums, some ships withdrawing temporarily, and possible re-emergence of naval escort or convoy operations, extending transit times.

The main impact mechanism is not oilfield shutdowns but reduced fleet efficiency. Quantitative modeling indicates that about 11 billion ton-miles of oil are transported daily via the Strait of Hormuz. If security measures, escort operations, or delays extend average voyage time by 5 days (from ~29 days), effective fleet productivity drops by about 17%. This translates into a daily effective capacity loss of roughly 2 billion ton-miles, or about 6% of global oil shipping capacity.

Given current daily crude and condensate flows (~50 million barrels/day), this equates to a supply tightening of 2-3 million barrels/day over several weeks. The shipping market would respond with higher freight rates, reallocation, and operational adjustments, but the initial impact could be significant relative to available spare capacity.

From a supply-demand perspective, such disruptions could surpass what can be offset by China’s strategic reserve buildup alone, testing Saudi and UAE spare capacity limits. Price and futures curve reactions could resemble early 2022, with sharp front-end price increases and widened spreads as traders scramble for near-term crude.

Unlike 2022, the primary balancing mechanism may not require sustained reductions in final consumption: higher prices and steeper backwardation would suppress autonomous inventory demand (notably in China) and accelerate shipping and operational adjustments, helping limit the duration of market mismatches.

Freight rates would also rise in tandem. As operational adjustments take effect and shipping continues under high risk, the effective tightness would gradually ease. But during the period of shipping disruption, prices could be significantly higher than Scenario 2, with normalization depending on the recovery of Gulf shipping confidence.

Price Outlook Adjusts but Remains Anchored to Scenarios 1 and 2

These scenarios reflect recent uncertainties around geopolitical supply risks. Nonetheless, our core view remains anchored in Scenarios 1 and 2—that physical supply disruptions are minimal or absent.

If such an outcome unfolds in the coming weeks, our regression framework (linking OECD commercial inventories and Brent M1-M4 spreads) suggests the geopolitical risk premium of about $7-9 per barrel could fade, the futures curve would flatten, and spot prices could fall back to the low-60s.

Beyond the near term, fundamentals remain weak. Temporary disruptions (e.g., Kazakhstan, U.S.) have kept January supply-demand tighter than expected, but these are reversing. Early Petro-Logistics data indicates OPEC+ output may rebound by about 1.2 million barrels/day in February.

Thus, our baseline still points to a surplus of roughly 2.5 million barrels/day in early 2026, easing to about 1.4 million barrels/day later in 2026.

We estimate about 0.8 million barrels/day of surplus will be absorbed by Chinese inventories, but we do not assume offshore floating storage will grow as much as in 2025. This leaves an estimated 0.6-1.7 million barrels/day of surplus to be absorbed by onshore inventories outside China, including a significant portion in OECD/Atlantic basin commercial stocks.

Historically, such inventory absorption could bring Brent front-month prices into slight contango later in the year. Applying our regression to forecast inventory trajectories suggests that, while recent de-escalation could push Brent back to the low-60s, the full-year inventory build in 2026 under pure fundamentals could be consistent with a steeper positive spread and near-month prices near $50.

But prices are unlikely to be driven solely by fundamentals: recent weeks have shown that geopolitical risk premiums can provide substantial support at the front end, especially when prices weaken, creating a negative feedback loop.

Our core expectation is that, as 2026 progresses, near-month Brent prices will gradually drift toward about $60/bbl. But unless geopolitical risks are more clearly and durably alleviated, the scope for prices to stay significantly below that level remains limited.

Figure 13: After January’s weakness, OPEC 9+3 output is expected to rebound by about 1.2 million barrels/day in February