Is $100 Oil Just the Beginning? Former IMF Economist Warns Crude Could Hit $200

TradingKey - Oil prices rose sharply on Thursday (March 12), WTI crude oil futures surged nearly 10% to $96.59 and remained at elevated levels on Friday; Brent crude continued to fluctuate above the $100 mark.

The catalyst for this surge was Iran's attack on multiple vessels in the Persian Gulf, accompanied by Tehran's warning that oil prices could soar to $200 per barrel. Despite the IEA's decision to release 400 million barrels from strategic petroleum reserves and the U.S. even "burying the hatchet" with Russia by temporarily allowing countries to purchase stranded Russian crude at sea, the market remains concerned about supply disruptions, causing prices to rebound.

This week, oil prices briefly approached the $120 threshold before falling sharply; they have now returned to the $100 level.

International crude prices have gained nearly 40% since March. However, Olivier Blanchard, former Chief Economist of the International Monetary Fund (IMF), warned that the current rally is not over and that there is still room for further increases, with $200 per barrel or higher being a possibility.

U.S. Military Declines Escorts; The "TACO Trade" Fails

Although Trump has repeatedly stated that the U.S. is ready to escort tankers through the Strait of Hormuz, Blanchard believes that fully protecting vessels in the strait is nearly impossible, and Iran has no reason to stop threatening them.

Iran's new Supreme Leader, Mojtaba Khamenei, stated that Iran will continue to take measures, including blocking the Strait of Hormuz and opening new fronts if necessary.

Blanchard argues that whether or not Trump declares the war over, there is no reason to believe Iran will stop threatening to destroy ships attempting to enter the Strait of Hormuz.

This is indeed the reality on the ground. According to people familiar with the matter, the U.S. Navy has rejected requests from the shipping industry for military escorts in the Strait of Hormuz almost daily since the conflict began, citing an excessively high risk of attack. U.S. Energy Secretary Wright also stated on Thursday that the U.S. Navy is not yet prepared to begin escorting tankers through the strait.

Furthermore, Blanchard believes this time is different and the market cannot rely on the TACO model to work again. TACO (Trump Always Chickens Out) refers to the pattern where Trump backs down at the last minute; in past events like the trade war or the Greenland dispute, he often rescinded his tough rhetoric at the eleventh hour, leading to de-escalation. Consequently, the market engaged in TACO trades, betting that Trump would ultimately retreat and financial markets would recover their losses.

Blanchard argues that this situation is different because a war has already begun, and the President cannot unilaterally decide how the conflict ends. Bob Elliott, CIO of New York investment firm Unlimited, cited a classic maxim: Once a war begins, it takes on its own momentum. JPMorgan Chase (JPM) Former head of quantitative strategy Marko Kolanovic also previously warned that Wall Street has no TACO solution for oil price spikes caused by war.

Prolonged Blockade Could Push Oil Past $200

Blanchard pointed out that the key to lowering oil prices lies in ensuring the smooth passage of ships through the strait, but this is currently unachievable. According to JPMorgan analysts' estimates, ongoing shipping disruptions in the Strait of Hormuz are creating a daily supply gap of 11 million to 16 million barrels of crude oil.

Blanchard believes that due to the oil supply shortage and very low demand elasticity, oil prices should be closer to $150 or $200 per barrel, or even higher—well above the current level of around $100.

Goldman Sachs (GS) also raised its oil price forecasts this week, citing longer-than-expected disruptions. The bank now expects transit disruptions in the strait to last 21 days, up from its previous forecast of 10 days. Under a more extreme scenario, Goldman Sachs predicts Brent crude could average $145 per barrel in March and April, while its base case forecast averages $98 per barrel.

Macquarie Group currently predicts that if the strait remains closed for several weeks, crude prices could break above $150.

Simon Flowers, Chairman and Chief Analyst at energy consultancy Wood Mackenzie, stated this week that $200 oil by 2026 is not impossible. Beyond the blockade of the strait, Flowers noted that due to damage to Middle Eastern production facilities, the supply chain will not recover quickly even after the conflict ends.