Israeli election deadlock: Citi still expects an Iran deal by year-end, but oil prices face a more volatile path
Citi believes the chances of a diplomatic deal and renewed escalation in the conflict over the next two weeks are closer to even; the geopolitical risk premium on crude could rise if Gulf facilities or shipping through the Strait of Hormuz come under threat.
Original source：Citi ResearchFirst published on Unhidea：Original source date：
Key takeaway
Israel’s government formation deadlock has increased the likelihood of renewed escalation involving the United States, Israel and Iran. Citi still bases its outlook on a negotiated deal by year-end, but expects greater two-way volatility in oil prices in the meantime.
How did the election result change the outlook for oil prices?
Citi believes the chances of an Iran deal and renewed escalation in the conflict over the next two weeks are closer to even. By contrast, had the incumbent government suffered a decisive defeat, the bank believes diplomacy would have had the upper hand, with the illustrative probability of a deal relative to escalation potentially rising to about two-thirds.
The bank still sees a negotiated deal before year-end as its base case, but expects the path to that outcome to be more volatile and to bring greater disruption.
Why does Citi expect government formation to be delayed?
At the time the report was written, about 72% of votes had been counted: the right-wing coalition led by Netanyahu was projected to win about 54 seats, while the opposition camp centered on Eisenkot was projected to win about 48 seats. Neither side reached the majority threshold of 61 seats.
Arab parties performed strongly, but Citi believes the opposition may still lack enough votes to form a government even with support from Ra'am, which has previously participated in a coalition government; seeking support from the Joint List as well could prove controversial among potential allies.
Citi believes a prolonged period of coalition negotiations is more likely, possibly followed by another election, with Netanyahu continuing as caretaker prime minister in the meantime. Vote counting was not yet complete, and the results, including military ballots, could still change the distribution of seats.
How does the political deadlock feed through to the crude oil risk premium?
Citi believes both Netanyahu and Eisenkot view Iran as a fundamental security threat, but Eisenkot is relatively more inclined to translate military gains into diplomatic outcomes; Netanyahu, under a caretaker government, may have a higher tolerance for military escalation.
If the conflict escalates again, particularly if Gulf infrastructure or shipping through the Strait of Hormuz is threatened, the geopolitical risk premium on crude could rise further; conversely, credible progress toward a deal could cause part of the premium already priced into oil to recede.
Citi believes the US midterm elections on 3 November 2026 could be a more important catalyst, as they could change Washington’s willingness to take further military action against Iran.
