What are the prospects for reduced geopolitical risk in 2024?

The key drivers of geopolitical risk are the Russian-Ukrainian War, Israeli-Hamas Conflict and friction between the US and China.  We see a mixed picture on the drivers of geopolitical risk and how this affects risk premium, particularly in oil.

Let’s start with the competition between the US and China.  This risk is trending down after the meeting between Xi and Biden.  Economic troubles in China along with a desire on both sides to prevent military accidents from getting out of control have resulted in confidence building steps to de-escalate things for the moment.   Combined with the presidential election in 2024, China probably is hoping that Trump does not get re-elected thus there are many reasons for toning down the tensions.

On the Russian-Ukrainian War, we see a statement and a greater chance that the war might conclude in 2024.  With neither side being unable to advance much further, Putin would prefer to negotiate a partial win since this would be seen as being adequate for the Russian domestic audience.   For Ukraine, it hopes to gain as much as possible of its territory before sitting down for negotiations.  It looks unrealistic that they will take back Crimea and all the land in Eastern Ukraine.  In addition, funding from both the US and EU is facing some resistance and Ukraine cannot assume this will be kept up for years.  Our forecast:  final battles in the Spring and Summer for territory and negotiations towards end of year.

Finally, the Israeli- Hamas conflict has the potential to spiral into a wider Middle East conflict. If that happens, then the political risk premium on oil would jump and we should expect higher oil prices. Things could get out of control if Hezbollah and Israel escalate further and this goes from a low-medium intensity front to a high intensity front.

Thus, we are watching to see if Hezbollah temporarily pulls back to the UN agreed line placing more space between itself and Israel. This would be a sign of de-escalation as there is more and more talk in Israel that the situation in the North unacceptable. Iran will probably not want to loose its most important proxy and will likely put pressure on Hezbollah. In addition, Hezbollah will have to calculate what a war would mean for the fragile Lebanese economy. Our scenario: de-escalation between Hezbollah and Israel as the costs for both sides will be high.

There is also pressure on the Houthis to probably de-escalate since 90% of their tax base goes through ports in Yemen. Attacks in the Red Sea have also impacted this revenue. In addition, the US could decide to use more force and would weaken the Houthis in Yemen. At the same time, the Houthis are in negotiations with Saudi Arabia to end the war, thus logic would say that they should calm things down.

However, things are still unclear and we see the Red Sea attacks tied closely to what happens in Gaza. Thus, if the Israeli-Hamas Conflict is seen as winding down within the next few months, the best course of action for the US is to not escalate further. The Houthis will eventually have to stop especially if the prospects of a two-state solution for Israel and Palestine is pushed further. While a two-state solution is not realistic currently, it might gain traction with a new Israeli government. In short, we see a very complex situation in this conflict without a neat solution or even a solution.