Oil price surge expected due to Middle East conflict

Rising oil and gas prices could harm the global economy, increasing inflationary pressures and recession risks.

US and Israeli strikes against Iran and the repercussions in the Middle East are expected to send oil prices soaring when markets open, and a prolonged conflict could hit the global economy.

“I expect oil prices to be between $85 and $90,” said Amena Bakr, head of Middle East and OPEC+ research at analysts Kpler.

That would mark a significant jump in the price of a barrel of Brent – the international benchmark for crude oil, which had gradually factored in a geopolitical risk premium to trade at more than $72 at the end of last week, compared with $61 at the start of the year.

With the regional turmoil, maritime transport is under threat through the Strait of Hormuz, which handles some 20% of global oil consumption.

The key waterway is not completely closed. Some Chinese and Iranian vessels are reported to have passed through. But it is as if it was shut.

In such a situation, insurance costs become prohibitive, said Bakr, and the main shipping companies have already confirmed that they are suspending the passage of their fleets along the route.

Trump’s ‘Achilles heel’

“While some alternate infrastructure could be used to bypass the Strait of Hormuz, the net impact from its closure would be a loss of 8 million to 10 million bpd (barrels per day) of crude oil supply,” said Jorge Leon, an analyst with Rystad Energy.

In theory, oil-importing countries have reserves, with OECD members required to maintain 90 days’ worth of oil stocks but prices above $100 cannot be ruled out.

If the blockade of the Strait of Hormuz continues, “no matter how much spare capacity [in the strategic reserves] is not going to fill that gap. That gap is just too big,” said Bakr.

Another analyst at Kpler, Michelle Brouhard, described high oil prices as “the Achilles heel of Trump”.

In her view, Iran is likely to look to keep crude prices high to force Trump to back down, as he promised his electorate low prices, at a time when the United States is already gearing up for mid-term elections at the end of this year.

‘Harmful effect’

Gas prices are also expected to soar, as Qatar is a key exporter of liquefied natural gas, heightening inflationary risks.

The rise in hydrocarbon prices is bad for the economy.

The last time crude prices climbed above $100 was at the start of the war in Ukraine. Gas prices also soared, which played a major role in a prolonged period of rising prices.

Rising petrol prices, higher energy prices, increased shipping costs and loss of revenue for air transport could have “a harmful effect on growth”, said economist Eric Dor, from the IESEG School of Management in Paris.

“If it’s a matter of three days, it’s not serious. But if it’s over a longer period, then it will have an additional recessionary effect,” he told AFP.

On the stock market, some sectors could be winners, such as defence, but Dor instead said he expected “declines” in share prices, particularly in the air transport, maritime transport and tourism sectors.

- Agence France-Presse