Brent crude oil prices have rallied to up to US$91.5 a barrel (as of Thursday, 19 October), following a devastating strike on a civilian hospital in Gaza as the conflict between Israel and Hamas heats up.
Prices had surged to as high as US$94 a barrel following the initial breakout in violence over the past weekend but fell back to US$83 before the latest surge.
Markets are bracing for an energy supply shock in the event of broadening of the conflict to other parts of the Middle East, particularly a clash between Israel and Hezbollah in south Lebanon.
Both Hamas and Hezbollah are heavily backed by Iran, one of the world’s largest oil exporters.
These risks have been flagged by global ratings agency S&P, which has released a statement warning of the impact of escalating geopolitical tensions on the global credit outlook.
“The eruption of war between Hamas and Israel in the Middle East puts further upward pressure on our global assessment of geopolitical risk that we already view as elevated and worsening,” S&P Global Ratings warned.
“This compounds the strain on international relations caused by the Russian invasion of Ukraine and the tense relationship between China and the US.”
The ratings agency said while it is not anticipating a large-scale breakout in the region, the conflict would exacerbate inflationary pressures and increase recession risks.
“While not underestimating the severity of the human tragedy unfolding in Israel and Gaza, our current base case is that the conflict will be largely contained to Israel and Gaza, limiting the geographic and credit impact outside the region,” S&P added.
“The risks of escalation involving the opening of a second front with full military engagement of Lebanese militant group Hezbollah remain material, but we think it less likely that Iran would become directly involved.
“A key risk in the event of escalation would be the potential for an energy supply shock, which could underpin inflation and weigh on economic activity.”
According to AMP Capital chief economist Shane Oliver, a sustained increase in oil prices could support the case for a more dovish monetary policy stance from the Reserve Bank of Australia (RBA).
“[Overall], we would see any further surge in oil and petrol prices that may flow from events in the Middle East as being a further dampener on economic growth and underlying inflation,” he said.
“As such, the RBA should look through it rather than further increase interest rates.”
Mounting global economic uncertainty has led to a spike in the gold price, which rose to as high as US$1,951 an ounce, just below the record high of US$2,007 during the COVID-19 pandemic.
Arian Neiron, chief executive officer at VanEck Asia-Pacific, has said investors should consider gold as part of their investment strategy.
“We think, in the face of a slowdown, gold should be considered as a part of a portfolio, and goldminers if you like value,” he said.
“Gold equities are trading at a discount relative to gold and they are at historically low multiples.”
Citing an analysis by Paradigm Capital, he said goldminers may be trading at a discount of up to 35 per cent relative to their 10-year historical average.
“Looking ahead, it’s easier to see more risk events with geopolitical tensions likely to continue to escalate as countries choose sides between East and West,” he observed.
“Risks in financial markets remain notable, the prospect of rates remaining elevated for an extended period. Gold’s appeal increases if the economy falls into recession.
“There is reason to believe too that the US dollar will be less of a headwind to gold.”
