Citi Research commodity strategists believe the initial impact of Iran’s April 13 attack on Israel will be for oil prices to drop below $90 per barrel.

The prediction comes “as prices had already rallied notably before the attack occurred (the risk was flagged in advance), and as the calibrated nature of the attack may lead to a pause in direct Israel/Iran confrontation,” Citi’s team said in a Sunday note.

“Our base case is for tensions to remain extremely high in the region, underpinning elevated oil prices, with our 0–3-month point price $88/bbl (up from $80/bbl previously) and our 2Q’24 average price $86/bbl (up from $78/bbl previously),” they wrote.

The bank’s new 0-3 month price target for West Texas Intermediate (WTI) crude now sits at $83 per barrel, from $75, while the average Q2 2024 forecast is $82 per barrel, compared to the previous $74 per barrel projection.

Citi said tensions in the Middle East are expected to remain high, noting that members of Israel's war cabinet have publicly expressed intentions to initiate a military operation in Rafah later this month or in early May.

This plan, controversial enough to draw disapproval from the United States, a historical ally, affected Citi's increased near-term price forecasts for oil. The strategists attribute the rise in oil prices to greater-than-anticipated impacts from Middle Eastern tensions, including shifts in oil inventories from on-land storage to on-water locations and increased speculative trading activities in anticipation of price movements.

“We believe prolonged tensions through 2Q’24 are now largely priced at $85- 90/bbl, and we highlight that the oil market has been broadly balanced in terms of supply and demand through 1Q’24, with inventories rising at the margin of late,” strategists noted, adding that any further de-escalation could push prices sharply to the high $70s/low $80s/bbl range.

Meanwhile, analysts at Wells Fargo said they anticipated “a muted oil price reaction” on Monday in the wake of Iran’s attack, citing “initial signs of calm but a tense backdrop.”

They added that prices should retain a conflict risk premium as the Israel-Gaza conflict continues.