Morgan Stanley’s latest analysis highlights how escalating tensions between Israel and Iran have injected substantial uncertainty into the global oil market, prompting a justified risk premium for Brent crude while the situation remains unresolved.
The analysis was published on June 16, which was prior to the U.S. attack on Iran and the closure of the Strait of Hormuz. However, the analysis also laid out a scenario of a potential disruption to the Strait of Hormuz as well.
The investment bank’s “The Oil Manual – Navigating Geopolitics: Three Scenarios” outlines three possible trajectories for oil prices, each mapped to the scale and longevity of any potential supply disruptions.
Scenario 1: Status Quo Holds, Brent Drops to $60
Under Morgan Stanley’s baseline assumption—the most likely scenario (at the time of publishing)—Iran’s oil infrastructure remains undamaged and exports, primarily to China, continue unabated. Citing the rapid stabilization of oil prices following the 2019 attack on Saudi Arabia’s Abqaiq facility, Morgan Stanley expects that, should no new disruptions occur, prices could revert to approximately $60 per barrel as oversupply concerns resurface.
Scenario 2: Partial Supply Disruptions Lift Brent to $75–80
The second scenario envisions limited disruptions, such as targeted Israeli strikes on Iranian export infrastructure or intensified U.S. sanctions, reducing Iranian exports by 0.5 to 1 million barrels per day. In this event, the oil market would transition from a mild surplus to a balanced state. According to Morgan Stanley, this could buoy Brent crude prices within a $75–80 per barrel range—a level historically consistent with balanced market conditions.
Scenario 3: Severe Disruption Sends Brent Soaring to $120
A more extreme scenario, considered less likely but plausible if conflict escalates, involves significant disruption to the Strait of Hormuz—a vital chokepoint that handles nearly a third of global seaborne oil trade. With limited alternatives for rerouting via Saudi and UAE pipelines, any bottleneck in the strait could necessitate demand destruction, triggering price surges reminiscent of those seen in 2022. In such a severe event, Brent could spike to as high as $120 per barrel.
Market Dynamics and Morgan Stanley’s Outlook
Morgan Stanley notes that market dynamics have shifted swiftly in response to geopolitical developments. The Brent futures curve has returned to backwardation, signaling tightening physical supply. Meanwhile, physical crude grades from regions like West Africa and the North Sea have posted notable gains. Light product refining margins—such as for naphtha and gasoline—have narrowed, while diesel and jet fuel margins have widened, reflecting changing supply-demand balances.
