Brent may hit $95/bbl in near-term, Q2FY25 target price raised by $5/bbl on geopolitical risk premium: ICICI Bank

Global crude oil prices continued to rise by two per cent over the last month responding an increase in geo-political tensions, even as physical markets turned less tight. Brent crude prices had breached the $90/barrel mark during the period in a response to what appeared to be a build-up of tensions between Israel and Iran. According to a report by ICICI Bank Research, Brent may hit $95/barrel-mark in the near-term over geopolitical uncertainties. 

On balance, the bank expects a broadly balanced physical market over 2024 and 2025 that could limit the extent of the downside potential. In the near-term, the prospect of continued geo-political tensions could result in the energy prices trading with an upside bias. The bank has also raised the target price for Brent by $5/barrel for Q2FY25 over geopolitical risk premium and supply disruption.

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‘’We raise our range from $75/bbl to $85/bbl in Q22024 to $80/bbl to $90/bbl to take in to account the geo-political uncertainty premium that could persist. A possible overshoot to the $95/bbl is possible in the near-term,'' said ICICI Bank.

Geopolitical tensions that triggered crude oil

Iran launched more than 300 projectiles (including around 170 drones and over 120 ballistic missiles) towards Israel on April 15 in retaliation to a suspected Israeli strike on the Iranian Consulate in Damascus, Syria on April 1, 2024. This attack pushed the conflict between the countries into a potentially explosive new phase. 

According to the Israel Defence Forces (IDF), 99 per cent of these missiles were intercepted with the help of the allies US, UK, Saudi Arabia and Jordan. In retaliation, Israel appeared to have hit three Iranian cities, although the damage was limited. Market tensions have eased off subsequently as there was no immediate hit to oil production on easing off attacks between the countries.

Besides, none of the major Middle Eastern countries appear to want to enter the conflict. The net result to push Brent crude prices have eased as the worst case outcome appears to have been avoided for the time being. Ukraine’s continued attacks on Russian oil refineries remains a concern. 

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Since January, the Ukrainian armed forces launched 23 attacks. These attacks have disrupted at least 15 per cent of the oil refining capacity in Russia so far. Russia has been able to quickly repair some of its refineries reducing capacity idled by the Ukrainian attacks down to 10 per cent from almost 14 per cent at the end of the March. 

Russian primary oil refining capacity, idled by drones, was reduced to 90,500 metric tons per day (660,000 barrels per day) from around 123,800 tons per day (907,000 bpd) previously. Russian refinery outages added to the unease ensuring that Brent crude prices trade above the $85/bbl mark. ‘’It remains to be seen whether Russian exports drop-off that could have a much severe effect on the demand-supply imbalances,'' according to economists at ICICI Bank.

Global demand, supply forecast

ICICI Bank sees demand picking by 1.2 million bpd in 2024 compared to 1.8 million bpd witnessed over 2023 reflecting sluggish global growth projections for 2024 of 2.8 per cent YoY, compared to three per cent YoY. 

‘’We continue to expect EMs to drive the demand higher led by India and China while US demand is expected to pick up marginally. Europe demand is expected to remain flat. For 2025, we expect the incremental demand to continue to increase an inch higher by 1.2 million bpd same as in the previous year taking the total to an average of 103.4 million bpd,'' said economists at ICICI Bank.

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The risks to the demand outlook remains fairly balanced at this point of time. The private-sector lender had anticipated the members of the Organisation of Petroleum Exporting Countries and its allies (OPEC+) to extend production cuts that that the bank expects to get extended further to December 2024. 

‘’The net result will be a fairly flat profile of output from OPEC. Instead, the incremental increase in supply is likely to continue to come from non-OPEC countries over 2024. We assume that global supply increases by 0.8 mbpd over 2024 driven by non-OPEC members output,'' said ICICI Bank.

‘’For 2025, we expect the global crude oil to increase by one mbpd compared to 2024, reaching 103.6 mbpd. We expect OPEC to increase production at the margin in 2025 responding to improvement in demand while further output increases are expected from non-OPEC members such as the US economy,'' it added.

However, risks to the global supply projections remain to the downside particularly going in to 2025 as uncertainty continues to persist about geopolitical tensions. ‘’An escalation that compromises Russia’s ability to supply or derails the supply from the Middle-East could work to compress supply much more relative to our expectations. Besides, OPEC could continue to keep production at sub-optimal levels as well,'' said ICICI Bank.

Global crude prices outlook

On balance, the higher profile for prices expected over 2024 has resulted in an increase in the average Brent Crude price forecasts from $80/barrel to $86/barrel over 2024. ‘’For 2025, a relatively balanced physical markets could result in an unchanged flat trading profile of $80/barrel to $90/barrel. Risks to our projections remain to the upside,'' said ICICI Bank.

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