Oil Price Forecast - Feb 19

[dan_s]

The comments below are from Josef Schachter. I subscribed to his Energy Report.

Iran’s negotiating strategy to drag out discussions with the US on thematic issues (guiding principals) and not substance makes it more likely that the US will attack Iran in the coming days. Iran has not made any proposals to end their nuclear program, give up their ballistic missile program (rumored to be 2,000 weapons), stop supporting terrorist groups and to stop killing its protesting citizens. These are red lines for President Trump. The US military has positioned sufficient resources in the area for a sustained multi-week battle to degrade the IRGC and their military assets.

Iran’s leaders have threatened to destroy the US fleet and particularly threatened the two US aircraft carriers with a plan to send swarms of drones to sink the battle groups. This is an assumption of their military capabilities that we see as out of line with the realities of their equipment and skill sets. They are not the Ukrainian special forces that have shown that capability against Russia’s navy in the Black Sea.

The financial markets are getting dismayed that Iran may go for a scorched earth plan that would mean attacking their neighbors energy assets, and maybe even destroy their own. Crude prices have lifted US$2/b on this fear to US$66.62/b. Our price range for Q1/26 has been US$54/b to US$68/b so we are nearing the high of our range forecast. If there is no destruction of energy assets in the area then no higher spike for crude is expected. However any direct attacks that destroy large volumes of supply would mean a spike up for a period of time. We do not expect this to occur. If the Mullahs or IRGC made such a move then the total destruction of the regime including decapitating the leadership would be the US’s follow up move. After the US swats the Iranian regime to provide the population and the conventional military the ability to topple the despots, the war premium should disappear.

We are quite optimistic on energy prices in 2026, but near term the sector is quite overbought. Hold off new purchases for now until we get our three BUY signals being triggered. For those with positions that are now outsized to portfolio requirements then harvesting is recommended to bring position sizes back to target levels. Starting in Q2/26 we see rising energy prices. First, we see inventories on land being drawn down starting in Q2/26. Second, we see OPEC having little spare production capacity (as seen in the January OPEC Monthly - analysis below) and third, we don’t see Russia being able to add much more production if there is a peace deal with Ukraine. Overall we expect WTI to average US$70/b in 2026 with over US$80/b in Q4/26. Our trajectory sees Q1 prices ranging from US$52 - US$68/b, Q2 from US$62 - US$72/b, Q3 from US$68 - US$78/b and Q4 ranging from US$74 - US$84/b. If this develops as forecast, energy stocks should have outsized returns in 2026 from the upcoming low.

[dan_s]

Iran:

The US has moved sufficient military assets into the area around Iran to be able to strike as early as this weekend. Military spokesmen say that the assets in the area could be fighting for weeks not days if necessary.

President Trump has warned the UK that it may need the military bases in Diego Garcia to attack Iran. Will the UK join the war if it spreads around the region.

Israel is preparing to aid the US in taking down the IRGC and the country’s ballistic missile sites.

President Trump’s decision process may include worries about the length of any war and the impact on crude prices. He would not want a spike up to US$100/b.

Iran has around 2,000 ballistic missiles and this will be a prime target of the US and Israel if the war turns into a large event versus a targeted surgical event that might be President Trump’s initial desire.

Iran has sealed its nuclear and ballistic sites against future US attacks. This may make the attack harder; it does not mean that airstrikes or ground operations are not possible. The US has satellite images of this work.

The US has smuggled in thousands of Starlink terminals into Iran so information on protests can reach international viewers. Protestors chanting ‘Death to Khamenei’ are reaching the outside world.

Iran is now targeting its own politicians that are not falling into line with the crackdown on dissidents. Seven members of Iran’s reformist movement were recently arrested.

The US is reaching out to the marginalized regular armed forces - the Artesh, to get them not to support the regime and to stand with the 90M Iranian people.

The IRGC held military operations that closed the Straits of Hormuz for live fire drills. Russia joined these exercises. Over 13Mb/d pass through these waters and make up 31% of global seaborne crude flows.