While oil seemed destined to fall to the $60 region in a supply-driven market, a geopolitical spark (Iran’s ballistic missile attack on Israel) was more than enough to revive the crude oil and put the central bankers on alert (they had promised them a lot). satisfied with the powerful disinflation) and investors. The price of Brent oil, a benchmark in Europe, remains on the rise this Wednesday with an increase close to 2% after having skyrocketed on Tuesday due to the rise in tensions generated between Iran and Israel. Currently, Brent is trading near $75 per barrel, up from $70 early Tuesday morning. The fear of a possible attack by Israel on Iranian deposits (source of income for Tehran), of more severe sanctions which also pulverize part of Iranian crude oil or of a total war inflates the geopolitical risk premium.
Iran is, in theory, subject to American and Western sanctions. Tehran, however, manages to export its crude oil with relative ease to countries like China or India, which are not directly in the Western orbit. Thus, Iranian oil production has gradually increased in recent years to exceed 3.2 million barrels per day. It is worth remembering that in 2019, when sanctions against Iran were applied more vehemently, the regime produced barely 2 million barrels per day due to a lack of buyers on the market. This suggests that if sanctions are tightened again, the oil market could lose more than a million barrels per day.
IG analysts point out in a published note thatThere has been market speculation about a possible Israeli attack on Iranian oil fields.. This could have further inflated crude oil prices. However, IG analysts believe that this scenario seems “unlikely”. Such action could push oil prices toward $80, antagonizing Israel’s allies who are working to control inflation. Instead, Israel appears more likely to attack critical weapons factories and military installations, similar to actions taken in April.
Another option would be for Israel to choose to carry out selective attacks against Iranian oil facilities. Something similar to the tactic that brought so much “joy” to the Ukrainian army in Russia, where unmanned drones disabled some of Russia’s most important refineries for days. However, like the direct attack on the fields, this tactic would result in a rapid increase in oil prices that could put the United States and Europe in a difficult situation to support and defend to their constituents.
The risk for oil
Erik Meyersson, chief emerging markets strategist at SEB, believes the Iranian attacks increase the likelihood of our risk scenario for global markets, with greater exposure of the region’s energy infrastructure. “Iran’s missile attack also opens the way for an Israeli attack on the country’s nuclear facilities. Netanyahu’s recent rise in popularity raises the possibility of snap elections. Iran may seem overwhelmed at the moment, but it retains the ability to cause damage to its allies in the region without sophisticated air defense,” he elaborates in a note to clients.
“Although the markets have anticipated during the year a low probability of an event of this type occurring, our concern has been that, in the case of a risk scenario, The main transmission channels not only involve higher crude oil prices and stronger inflationary pressures.but also tighter global financial conditions, lower asset prices and generally weaker sentiment,” adds Meyersson.
The harmful consequences of these results would be particularly serious among net energy importers, including several in Europe and Asia, warns the expert. Furthermore, he adds, if a global period of risk aversion occurs, it could further tighten financial conditions in emerging markets due to the appreciation of the dollar and the widespread shift of investors to safer assets .
Focusing particularly on derivative products for the oil market, the Capital Economics team of analysts made up of Simon MacAdam, Jasontuvoy and David Oxley, asks to first discern between the two scenarios which now open up once the of an Iran kept apart. excluded. On the one hand, like what happened in April, Iran could launch highly targeted retaliatory attacks against Israel, designed as a show of force rather than an effort to escalate the conflict. On the other hand, the situation may escalate in various ways, drawing Israel and Iran into direct conflict.
“Direct conflict between Iran and Israel would clearly be a major problem; Iran accounts for around 4% of global oil productionSo concerns about a supply disruption in this scenario could send oil prices skyrocketing, potentially to between $90 and $100 per barrel. And to the extent that disruptions in the Strait of Hormuz disrupt liquefied natural gas (LNG) shipments from Qatar, this could also extend to natural gas markets,” these strategists explain.
That said, even if Iran tried to restrict shipping through the Strait of Hormuz, Qatar’s relatively warm relations with Iran mean that Qatari supplies could still pass through there, and oil supplies from the Saudi Arabia and the United Arab Emirates could potentially be diverted via pipelines to the Red Sea. ports. And in any case, given the likelihood of a military response, likely led by the United States, we doubt that Iran will, in practice, be capable of closing the strait for long.
Oil at $100?
If Iran and Israel entered into direct conflict and oil prices rose to $100 per barrelcontinues Capital Economics, this would increase inflation by 0.75 percentage points in major developed markets: “It is clear that the precise rise in oil prices is very uncertain. It is therefore worth keeping the rule in mind” The general consensus is that a 5% annual rise in oil prices typically adds about 0.1 percentage points to average inflation in developed markets. »
Combined with rising natural gas prices and a pass-through of rising energy prices to continued high utility inflation, overall inflation in developed markets could be nearly a percentage point higher percentage, to which central banks would likely respond by further cutting interest rates. slowly, underlines the analysis house. And rising energy prices would pose an additional obstacle for global industry, already in recession.
When it comes to global container shipping and, therefore, maritime trade and supply chains, Capital Economics considers it unlikely that a direct conflict between Iran and Israel would deal a major blow. “After all, while shippers would undoubtedly take steps to distance themselves from the region, the main supply disruption (i.e. effectively closing the Red Sea to container ships) has already had Thus, an escalation of the conflict would only reinforce the idea that the Red Sea will not be reopened in the near future,” they say.
However, despite all these risks, it is hoped that this will only be a “flash” rise in the price of oil, as has happened at other times of conflict in the Middle East.. “Historically, during crises in the Middle East over the past three decades, crude oil prices have experienced short-term increases but quickly realigned with broader supply and demand dynamics.”say these experts.
