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.

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