Oil prices will need to reflect a “security premium” for the “foreseeable future,” as investors assess the potential of disruptions to supply flows due to the Iran conflict, according to analysts at investment firm Carlyle.

On Tuesday, soared 4.3% to $81.10 a barrel and rose 4% to $74.05 a barrel. Both contracts closed more than 7% higher after climbing as much as 13% to one-year highs on Monday.

Tensions have intensified after Iranian officials vowed to attack any ship attempting to pass through the vital Strait of Hormuz waterway, raising the prospect of disruption to crude flows from the major Gulf producers.

In a note, the Carlyle analysts including James Stavridis and Jeff Currie argued that while a recent oil supply glut could help cushion the blow from any shipping stoppages through the Strait of Hormuz, crude prices are anticipated to remain “high and volatile” due to broader structural changes in oil flows.

“We are unlikely going back to just-in-time energy,” they wrote, referring to a longstanding reliance on worldwide energy supplies to instantly meet demand.

Instead, investors must grapple with what the analysts described as a “fragmentation” of the world into two blocs backed by the U.S. and China which will “increasingly require” two separate supply chains.

The Carlyle strategists said this “bilateral U.S.-China world” would make Iran’s closing the Strait of Hormuz, in particular, “extraordinarily difficult.” Without cooperation from China, a key ally of Iran and heavy importer of oil that flows through the Strait, it would be “nearly impossible” for Tehran to close the waterway for an extended period.

Rather, the analysts said their prediction of elevated oil prices is based on a potential “security premium,” a repricing driven by crude hoarding in an uncertain supply environment and possible Iranian “asymmetric” attacks such as “cyber activity, terrorism, and proxy forces.” Iraq, the second-largest producer in the OPEC group, could be a target of such strikes, the analysts said.
Source: Investing.com