AMP chief economist Shane Oliver said the US intervention has dramatically increased the risk of disruption to global oil supplies, particularly if Iran escalates.
Speaking to InvestorDaily on Monday, Oliver said: “Right now, it’s a waiting game and depends on what Iran does.”
Oliver noted that if Iran ultimately prioritises regime survival and backs down, as seen in the Gulf Wars, markets could rebound quickly.
“If after a lot of threats and maybe even a few token moves, Iran prioritises regime survival and ‘surrenders unconditionally’ as Trump demands, then oil prices will quickly settle down and shares will rally,” the chief economist said.
“This is basically what happened when the US coalition entered the first and second Gulf wars.”
But the risks are mounting. Iran has said it “reserves all options” and is reportedly weighing its response. That could include attacks on US military bases or even disruption of oil shipping routes through the Strait of Hormuz.
“As 20 per cent of global oil supplies and a quarter of LNG trade flows through the Strait, any disruption could push oil prices above US$100 a barrel, possibly to around US$150/barrel,” Oliver said.
“This would likely only be brief, as the US military would likely quickly move to stop Iran. But even if it’s only for a few weeks, it would still be a big blow to confidence regarding the economic outlook and so could push shares down by 5–10 per cent at least.”
So far, markets have reacted with caution rather than panic. US equity futures were down just 0.4 per cent, Australian shares fell only slightly on Monday and oil rose modestly – WTI hovering around US$75 and Brent at US$78. Gold, meanwhile, remains below last week’s highs.
“All up the risks are all still skewed towards more weakness in shares and related growth assets like bitcoin and upside to gold and oil – but it all comes down to how Iran reacts,” Oliver said.
Stephen Miller, investment strategist at GSFM, said he was “a little surprised” at how subdued the market’s response has been.
“I am a little surprised at how calm markets appear to be in the face of what is undoubtedly elevated uncertainty,” he said. “I would have expected more outsized reactions and for gold to rally.”
He believes markets are pricing in an overly optimistic scenario.
“I suspect that markets have embraced a narrative that the American bombing campaign has left Iran essentially isolated and impotent in terms of any meaningful response,” Miller said.
“This is not a narrative that I buy into but as I say, it is one the markets are contemplating. In other words, given the distribution of possible outcomes, markets have adopted a scenario that appears to me at the optimistic end of the spectrum. I see that as reflected manifest complacency ... but I might be wrong.”
Instead, Miller warned that the conflict heightens the risk of a “stagflation-lite” scenario. He pointed to last week’s US Federal Reserve revision, which lifted its core inflation forecast for 2025 to 3 per cent while cutting its growth projection to 1.4 per cent.
“This conflict must increase inflation risks and reduce growth, markets are not reflecting those risks,” he said.
“I’m not talking a replay of the 70s but higher inflation (greater than 3 per cent) and lower growth are real risks.”
As for how Australia will fare, Oliver said the main impact would be felt through higher petrol prices. If oil reaches US$100 a barrel, it could add around 25 cents per litre to local petrol prices, on top of the 15 cents already implied by current oil levels. Under this scenario, the Reserve Bank would face a dilemma.
“The RBA would probably delay a potential cut in July if that were the case although I think the cash rate would still fall to 2.85 per cent by February next year as the negative impact on spending from higher petrol prices would offset the boost to headline inflation.”
