Oil continues to trade higher on the back of further missile strikes across both Israel and Iran, as fears grow that the conflict could be prolonged.
On Friday, Israel launched what it termed “pre-emptive” strikes on Iran, targeting nuclear sites as well as officials and scientists.
Unsurprisingly, markets reacted swiftly as news trickled out over the extent of the strikes and fears of Iranian retaliation grew.
However, while oil prices initially surged, they have now settled at around US$75 a barrel despite the predicted retaliation taking place.
AMP chief economist, Shane Oliver, said little had changed, and the key for markets will be if oil supplies are disrupted.
“So far this had not happened – but with the conflict still escalating, Israel hitting gas infrastructure and targeting the ‘regime in Tehran’ and Trump saying they may have to fight it out for a while, the risk is high, meaning a high risk that oil prices will rise further,” Oliver told InvestorDaily.
“Along with ongoing uncertainty around US tariffs, it poses a high risk of renewed volatility, and a short-term pullback in shares, particularly given that the risk premium offered by US shares over bonds is around zero and not much higher in Australia.”
While Iran is among the larger oil producers globally – the third largest among OPEC nations – it still only accounts for around 4 per cent of supply.
As Janus Henderson Investors portfolio manager Oliver Blackbourn noted, its proximity to other key producers like Saudi Arabia makes “potential escalation meaningful”.
“Israel’s air strikes on Iran again bring to the fore the geopolitical risks that remain in the Middle East. The attack also resurfaces the issues around the potential impact on the supply of oil and gas to global markets, given the large percentage of the energy trade that flows near to Iran,” Blackbourn said.
“Looking forward, we need to see whether Israel feels it has accomplished its objectives, and if there will be follow-up assaults.”
He argued that Israel targeting nuclear infrastructure and high-ranking officials could see a “greater response” from Iran than in prior exchanges, adding that whether it attacks US assets in the region is “one of the most pertinent questions”.
Outside of oil, Blackbourn said the reaction from global markets has been “relatively muted compared to recent shocks”.
“In fact, we have seen that major government bond yields were higher on the day (13 June) as investors worried about the potential increase in inflation from higher oil and gas prices,” he said.
“Most major equity market indices were down by more than 1 per cent but have been bouncing back from the lows earlier in the day when the attacks were first reported.”
No end in sight
According to Dr Ben Zala, senior lecturer in international relations at Monash School of Social Sciences, despite “extensive damage” to Iran’s nuclear facilities, Israel is likely to continue the bombings for “the next few days at least”.
“The most important sites are deep underground and in what are essentially hardened bunkers,” Zala said.
“The extent, and type, of Iranian retaliation will also dictate how long both sides continue to strike each other. It is very likely that attacks of different kinds will continue for some time yet, which means any effect on global markets could play out over weeks and even months.”
Echoing the concerns of economists, he noted that if Iran were to “widen its reprisals” to include US or UK bases, escalation could worsen.
“We know from history that at that point, a crisis becomes much more difficult to control,” Zala said.
Janus Henderson Investors research analyst, Noah Barrett, agreed that the conflict is “far from over” following commentary from both Iran and Israel, opening the door for “targeted strikes on oil infrastructure”.
“Additionally, in retaliation, Iran could close the Strait of Hormuz, disrupting the roughly 25 per cent of global oil shipments and 20 per cent of liquified natural gas shipments that flow through the Strait each day, pushing prices higher,” Barrett said.
However, if there are no signs of oil production or flows being disrupted, crude prices could pull back as the “outlook for supply in the second half of 2025 is likely to be increasingly driven by an expected rise in production from OPEC and its allies”.
Monash Business School professor of econometrics and business statistics, Robert Brooks, said any disruption to supply chains is “particularly concerning” for Australia.
“As global oil prices rise, so too do local energy costs – which feeds into broader inflationary pressures. That not only affects household budgets but also potentially dampens consumer spending and business investment confidence,” Brooks explained.
