Israel-Iran conflict: Oil prices soar and local shares fall on fears of escalating Middle East conflict

Kiwis will feel the financial fallout from the escalating conflict between Israel and Iran in the form of higher petrol prices, with crude oil rising by about 8% over the weekend.

International markets also took a dive at the weekend, with Wall Street’s major indexes down between 1% and 1.8%.

The local NZX50 fell 0.76% on Friday as it absorbed news of the first strike by Israel.

It has opened this morning down a quarter of a per cent, putting the total fall since the start of the conflict in line with Wall Street losses.

Higher oil prices will flow through to local retail prices in the coming weeks. But it is unlikely to cause major inflationary pain, given that there has been downward pressure on oil prices in the past several months.

According to the retail price tracking website Gaspy, petrol prices have fallen about 5% in the past month.

Trading this morning at US$74 a barrel, Brent Crude is still well short of the recent highs.

It was trading at US$81 a barrel in January and has been as high as US$86 in the past year.

Israel has targeted Iranian oil production facilities with limited success.

The National Iranian Oil Refining and Distribution Company has said that oil refining and storage facilities had not been damaged and continued to operate.

Regardless, analysts believe that Opec nations have enough spare capacity to cover a shortfall in Iranian supply.

Of bigger concern is the prospect that the conflict could widen and impact shipping through the Strait of Hormuz.

About a fifth of the world’s total oil consumption passes through the strait, or some 18 to 19 million barrels per day (bpd) of oil, condensate and fuel, Reuters says.

The New York Times says Iran’s response will be key.

Its position on the northern side of the Strait of Hormuz means that it could severely disrupt global energy markets.

If Iran were to close the waterway connecting the Persian Gulf to the Gulf of Oman for even a short time, oil prices could rise anywhere from $8 to $31 a barrel, analysts at ClearView Energy Partners told the New York Times.

While the Israel-Iran conflict is another unwanted geopolitical risk for financial markets, it is one that they may be able to able to assess and absorb in a relatively calm manner.

The Volatility Index (VIX), which runs on the Chicago Futures Exchange and measures the stock market’s expectation of volatility based on S&P 500 index options, has risen sharply on news of the conflict.

But at 20 index points, it still sits well below the level of volatility that was registered after US President Donald Trump’s Liberation Day tariff announcement.

The Volatility Index hit 53 points on April 8 and 66 points in March 2020 as Covid hit.

Markets are typically most rattled by events that lack precedent and, sadly, conflict in the Middle East does not qualify on that score.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist and also presents and produces videos and podcasts. He joined the Herald in 2003.