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Oil prices in focus as Middle East conflict raises global concerns

By Maja Garaca Djurdjevic
3 minute read

In response to an attack on its consulate in Syria, Iran’s retaliatory strikes on Israel have ignited concerns of a broader conflict with far-reaching consequences.

With Iran’s oil production accounting for about 3 per cent of global supply, any escalation poses a significant risk to oil markets, particularly affecting the flow through the vital Strait of Hormuz, economists have said.

Out of concern for this escalation, share markets have responded with the US share market down by 1.5 per cent merely in anticipation of the attack, while the Australian S&P/ASX 200 Index dropped by 0.4 per cent, equivalent to 31.4 points, opening at 7756.7 on Monday.

“An escalation that pushes oil prices much higher as Iran is drawn would threaten the global outlook buy pushing up in inflation and inflation expectations, resulting in higher than otherwise interest rates and by acting as a tax on consumer spending,” AMP’s Shane Oliver told InvestorDaily.

“Australian petrol prices averaging around $2/litre and $2.23/litre in Sydney are already around record levels.”

According to the chief economist, the severity of the situation hinges on subsequent developments.

“If Israel responds aggressively then the risk of escalation is very high,” Oliver warned.

However, he also noted that Iran’s prior warning and minimal damage, akin to its response after the 2020 US strike on General Soleimani, suggest a potential for containment.

“Everyone feared the worst and then there was little flow on,” Oliver said.

However, he acknowledged that the risk is substantial, particularly at a time when market valuations are stretched and investor sentiment is buoyant.

Also commenting on events taking place in the Middle East over the weekend, David Bassanese, chief economist at Betashares, said: “Iran is one of the world’s leading oil producers, and any disruption to its capacity to supply global markets could see oil prices rise further, pushing up global inflation from still overly high levels.”

BlackRock also noted its attention is on developments in the Middle East.

“US crude oil prices hit six-month highs, partly on heightened tensions in the Middle East. We are watching developments closely after Iran’s strikes in Israel over the weekend and see heightened geopolitical risks adding to economic volatility,” the firm said in its weekly commentary.

“US stocks fell nearly 2 per cent last week and 10-year Treasury yields pulled back after hitting 2024 highs near 4.6 per cent after the March CPI report. The reported showed services inflation may put upward pressure on overall inflation sooner than we thought.”

Gold rises

Gold prices rose 0.7 per cent on Monday, drawing in safe haven bids. The price of the yellow metal peaked on Friday at above $3,730, before dropping slightly over the weekend and rebounding to around $3,650 on Monday morning.

The commodity has climbed some 14 per cent for the year thus far.

Gold’s strong performance over the past few years has been linked to rising geopolitical tension among other things.

According to ANZ senior commodities strategist Daniel Hynes, both the Israeli airstrike on the Iranian embassy in Syria and the Russia-Ukraine war have rocked markets, helping propel gold as a safe haven.

“Safe haven buying as a consequence has been pretty strong,” he said last week.

JP Morgan forecast gold to stand at some US$2,250–2,350 by year-end.