Geopolitical Tensions Anchor Oil Near Highs: Rabobank

Key Moments

Market Focus Shifts Back to US-Iran Risks

Rabobank Senior Macro Strategist Bas van Geffen notes that crude benchmarks have pushed up to their highest levels since April as investors concentrate on the prospect of renewed escalation in the US-Iran conflict following US midterm elections.

The bank indicates that evidence has been mounting of potential new US military action against Iran, a development that has helped drive the latest leg higher in oil prices.

Rabobank’s War Scenario and Regional Implications

Rabobank’s global and energy strategy teams outline a scenario in which the US, Israel and a broader Arab and European coalition are expected to engage militarily with Iran and the Houthis, while also defending Saudi Arabia.

According to this assessment, any such escalation would likely be met with attacks by Iran and the Houthis on Gulf nations and potentially on Egypt. The analysis suggests that hostilities could persist until the end of 2027Q1, with intensity fluctuating over time.

Refined Products and Supply Constraints

Rabobank stresses that extended conflict would be a key factor keeping oil prices elevated, with particular concern centered on diesel and marine fuel oils.

The strategists point out that, between the wars in Iran and Ukraine, nearly 12% of global refining capacity for gasoline, diesel and other fuels is currently offline, constraining supply and supporting higher refined product prices.

Inventories, Price Outlook and Inflation

Rabobank warns that oil and product inventories would decline even more sharply if there is a simultaneous escalation in both the Russia-Ukraine and Middle East theaters.

The strategists argue that the only route to sustained lower prices and rebuilding of stockpiles would be a “double de-escalation” in both the Russia-Ukraine and US-Iran conflicts. This framework underpins the bank’s decision to revise its refined product price forecasts higher.

Against this backdrop, Rabobank concludes that energy-related inflation pressures are likely to persist. The report notes that President Lagarde has acknowledged that inflation will remain significantly above target in the coming quarters.

“But all eyes are increasingly turning to the US midterm elections next week, and the risk of renewed escalation of the US-Iran war after the polls have closed. Oil prices rose to the highest level since April as evidence builds of possible new US strikes on Iran.”

“As our global and energy strategists write, we assume the US, Israel, and a broader Arab and European coalition are likely to attack Iran and the Houthis and to defend Saudi Arabia. If such an escalation happens, Iran and the Houthis would probably attack the Gulf countries and potentially Egypt. This fighting could last until the end of 2027Q1 at varying intensity.”

“That will contribute to elevated oil prices. Our main concerns remain diesel and marine fuel oils. Between the wars in Iran and Ukraine, nearly 12% of the world’s refining capacity for making gasoline, diesel and other fuels is offline.”

“Inventory declines will be even steeper if we see double escalation in Russia-Ukraine and the Middle East, and it looks like the only path forward to lower prices and rising inventories is double de-escalation in both Russia-Ukraine and the US-Iran wars. This is the basis for revising our refined products forecasts higher.”

“So, energy inflation is bound to stay high for some time. President Lagarde admitted that inflation will stay well above target in the coming quarters.”