Citi has projected that both the United States and Israel will likely take limited actions against Iran in the short term, focusing on strategies that avoid escalating tensions and push Iran toward negotiations regarding its nuclear program. This assessment was detailed in a note from the bank on Thursday.
The anticipated measures are expected to be incremental, possibly involving restricted U.S. military operations and the seizure of oil tankers. These actions are likely to maintain a heightened risk premium in the oil markets as concerns linger that Iran may attempt to close the crucial Strait of Hormuz, a key transit point for global oil supply.
In response to these geopolitical tensions, oil prices surged by 3% on Thursday, reaching a five-month high as uncertainties grow over potential disruptions in global supplies linked to possible U.S. strikes on Iran, one of the major crude producers within OPEC. Reports suggest that U.S. President Donald Trump is contemplating options that may include targeted strikes against Iranian security forces to galvanize domestic protests. However, Israeli and Arab officials have expressed skepticism, indicating that air power alone is unlikely to dismantle Iran’s clerical leadership.
Citi assigns a 70% likelihood to its base case of limited actions, emphasizing the U.S. government’s concern over rising energy prices amid domestic political implications. The bank cited President Trump’s inclination to avoid a military conflict, along with the possibility of evolving internal pressures within Iran that could facilitate negotiations. Meanwhile, it does not foresee a significant retaliatory response from Iran, as the nation is grappling with economic struggles and civil unrest.
Additionally, Citi assesses a 30% chance of increased but restricted conflict within Iran, potentially leading to sporadic disruptions in oil production and exports. There is also a 10% risk of more substantial regional supply losses due to civil unrest involving American and Israeli intervention. Nevertheless, the bank is optimistic about a possible U.S.-Iran deal and de-escalation by 2026, which could lower the current geopolitical risk premium associated with Iranian tensions, estimated at $7 to $10 per barrel, with Brent crude trading near $70.
As of Thursday, Brent futures closed at $70.71 per barrel, highlighting the ongoing fluctuations in the oil market driven by geopolitical concerns.