Geopolitical risks to the oil price are increasing. (UBS)

Iran’s Islamic Revolutionary Guard Corps has also launched missile strikes on targets in Iraq, Syria, and Pakistan, adding to fears of a broader conflict in the Middle East.

But the reaction in oil markets has been muted so far. In our view, the market’s complacency over the risk of disruption suggests an unduly bearish view on the price of oil.

Geopolitical risks to the oil price are increasing. Retaliation against the Houthis increases the risk that Iran is dragged into a widening of the Israel-Hamas conflict. If that were to reduce the supply of Iranian oil to global markets, and supply through the Gulf of Hormuz were to be materially and persistently disrupted, it is possible that Brent climbs back toward USD 100 per barrel.

In addition, the escalation in tensions comes against the backdrop of an oil market that we believe will be slightly undersupplied through much of 2024, with demand continuing to grow and OPEC+ maintaining tight control on supply.

Takeaway: Our base case is for the price of Brent crude to rise to around USD 85 per barrel (from USD 78.50 at present). We continue to advise investors with sufficient risk appetite and risk capacity to sell downside risk in the price of Brent, or to add longer-dated exposure to Brent. Investors can also consider hedging portfolios through energy stocks.

Original report - Stocks and bonds have room for further gains in 2024, 22 January 2024.