Duncan Bridgeman: Power in the oil market has shifted

The price of Brent crude oil initially jumped 3.6 per cent to US$70.75 a barrel yesterday before easing back below $70. Photo / AP

COMMENT:

It may appear unseemly to think about your investment portfolio or monthly fuel bill in the context of potential war in the Middle East.

But the risk posed by the escalating United States-Iran conflict is starting to affect global markets more acutely after the attack on American forces in Iraq.

The price of Brent crude oil, a benchmark for fuel prices, initially jumped 3.6 per cent to US$70.75 a barrel yesterday before easing back below $70. By mid-afternoon New York-time, Brent was down 4.4 per cent at $65.24 a barrel.

The S&P 500 equity futures initially dropped 1.6 per cent before bouncing back to a 0.3 per cent fall. US stocks then rose; the Dow Jones Industrial Average adding 189 points, or 0.7 per cent, and the S&P 500 gaining 0.5 per cent following comments from Iranian officials and US President Donald Trump indicating both countries were hoping to lessen tensions.

The local S&P/NZX 50 index, which had previously shrugged off the heightened tensions in the Middle East, fell about 1 per cent as the news filtered through and ended up closing yesterday down 0.6 per cent to 11,557.

The big questions are, what happens next, and where does it end?

New Zealand consumers may end up paying more for petrol if oil prices continue to rise.

In September petrol prices at the pump increased 5c to 10c a litre when the Brent crude price surged 20 per cent after drone attacks in Saudi Arabia.

However, any flow-on effects may not be felt as acutely around the world as previous conflicts in the Middle East.

This is because the oil-production landscape has changed whereby the US is now one of the world's largest oil producers, creating a paradigm shift in terms of the global supply and demand balance.

KiwiSaver investors have enjoyed a decade-long bull run but can expect volatility to increase if conflict grows.

For now equity markets appear to remain optimistic that both Iran and the United States have no wish to engage in full-scale war.