Key Takeaways
Events in Israel and Gaza are first and foremost a
human tragedy. As the situation remains highly
volatile, we sketch four scenarios illustrating what
could happen next.
A ground invasion of Gaza is the base case. Markets
probably largely price this in.
In this scenario, the impact on energy markets would
likely be limited to reduced Israeli gas supply, tighter
international policing of Iranian oil sanctions, and the
removal of the expected increase in Saudi oil supply.
There is a meaningful risk of escalation of the conflict
to other Iran-backed actors, most obviously Hezbollah
in Lebanon. Israel would be left fighting on two fronts
– in Gaza and on the Israel-Lebanon border. In the
most severe, but unlikely, escalatory scenario, Israel
and Iran could enter outright conflict.
In these scenarios, OPEC spare capacity is probably
sufficient to cover the loss of 1.4 million bpd of Iranian
exports. But there would also be a wider risk to the
20% of global flows that pass through the Strait of
Hormuz. Oil prices above $140 per barrel may be a
plausible, if unlikely, worst case.
Finally, there is a (unfortunately small) probability of
de-escalation and ceasefire without a ground invasion.