Citi said that it expects U.S., Israel and other countries to take limited action against Iran over its nuclear program in the near future. This will avoid an escalatory reaction to force the country to a deal.

Bank of America said that the smaller steps could include limited U.S. military action and oil tanker seizures, which are expected to raise the risk premium on oil markets, particularly due to concerns Iran might shut down the Strait of Hormuz, a key transit point.

On Thursday, oil prices rose 3% to a new five-month high amid growing concerns that 'global supply could be disrupted if U.S. attack Iran, OPEC’s largest crude?producer.

Multiple sources claim that U.S. president Donald Trump is considering options to deal with Iran, including targeted strikes against security forces and leaders in order to inspire protesters. Israeli and Arab officials, however, have said that air power alone would not be enough to topple the clerical regime.

It said that the bank's base-case for limited action, for which it gave a 70% chance of happening, "reflects U.S. sensitivities to higher energy costs" due to domestic political concerns, and that "President Trump’s preference to avoid war, as well as the likelihood of ongoing domestic pressures in Iran providing?potential changes that could lead a deal", it stated.

Citi does not anticipate a big response from Iran, "as the country is also not interested in war due to its faltering economy."

The?bank predicts that there is a 30% probability of an escalating but limited conflict in Iran, resulting in intermittent disruptions to oil exports and production. There is also a 10% chance of significant regional supply losses due to civil unrest between the U.S.

Citi's base case assumes a U.S. Iran deal and a reduction in the geopolitical risks associated with Iran. Brent is currently around $70, so this would lower the Iran risk premium.

Brent futures settled Thursday at $70.71 per barrel. (Reporting and editing by Christian Schmollinger in Bengaluru, Anushree mukherjee from Bengaluru)

(source: Reuters)