How a Persian Gulf conflict could impact commodity markets

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SINGAPORE: Soaring oil and gas prices, soaring insurance costs, and attacks on energy and banking infrastructure will likely be some of the first impacts if the current Iranian tension escalates into outright war.

A protracted conflict in the Persian Gulf could help tip the US and global economies into recession and even accelerate the shift away from fossil fuels globally. Here’s what some oil, commodities and geopolitics analysts consider the most likely outcomes.

Will the Strait of Hormuz be closed?

In a limited confrontation, the flow of oil and other commodities is expected to continue across the strait, with the warning that some tankers could be targeted by Iran, said Ian Bremmer, chairman and founder of Eurasia Group, a political risk research and consultancy firm. In a major war, Iran could close the strait and lay mines.

A concerted effort will be made to keep the strait open, and before any military strike begins, a ship protection plan will have been developed with other countries in the region, such as Saudi Arabia, Ole Sloth Hansen said. , Head of Commodity Strategy at Saxo. Bank A / S. Insurance costs will skyrocket, or there will be no coverage at all, and shipowners without coverage may be reluctant to risk their vessels.

The idea that the Strait of Hormuz would close is “nonsense,” said Fereidun Fesharaki, chairman of energy industry consultant FGE and adviser to the Iranian government in the 1970s. If a ship sinks in the strait, it could close for a few weeks. , but then the traffic will resume. If the Iranians try to shoot anything that passes, then the British, the French and everyone else will be involved.

“The Iranians know that if they do, they will lose big, even if their proxies could put mines in the strait.”

How would oil and gas prices react?

Oil could climb to $ 100 a barrel or more immediately after the outbreak of a war, but would likely move closer to $ 80 once some resilience of the region’s exports is demonstrated, said Ken Medlock, senior director of the Rice University Center for Energy Studies in Houston. . While the rise of the U.S. shale may mitigate the impact a bit, it cannot offset any major disruption in the Middle East.

Crude could hit $ 90 a barrel before collapsing due to the negative impact on global demand, Hansen said. The level he achieves will depend on his ability to maintain a safe passage through the Strait of Hormuz.

In the event of a full regional conflict, oil will exceed $ 100 a barrel and could even reach $ 150, Bremmer said. If there are only limited strikes, oil could reset to around $ 80.

Liquefied natural gas prices may increase more than oil prices due to the fact that a greater proportion of global flows pass through the Strait of Hormuz than for oil.

“No matter what peak you get in oil, you are likely to get double the peak in spot LNG,” said in June David Hewitt, oil and gas analyst at Macquarie Capital Ltd.

The market largely rules out the risk of war for now, Fesharaki said. If there is a major attack and retaliation, Brent could drop from $ 90 to $ 100 a barrel. LNG would also be affected, but the market is surplus and dominated by Qatar, which has good relations with Iran, so it is unlikely to be targeted by Tehran.

How vulnerable is the Middle East’s energy infrastructure?

Abu Dhabi in the United Arab Emirates is most vulnerable to conflict because its oil facilities are in a small area, unlike Saudi Arabia where they are widely dispersed, Fesharaki said.

“Their fields are nearby, those at sea can be hit immediately. Once they launch a few missiles, foreign companies will evacuate, and if they don’t have foreign workers, they can’t produce the oil.”

There would likely be an increase in Iranian cyber attacks against energy and banking targets in Saudi Arabia and the United Arab Emirates, Bremmer said.

What will some of the indirect impacts be?

Japan, India and South Korea are said to be among the economies most vulnerable to a Persian Gulf war due to their heavy reliance on the region’s crude oil. India imports over 80% of its oil and about two-thirds comes from the Middle East.

Each 10% increase in the price of a barrel of crude increases the country’s current account deficit by about 0.4% of gross domestic product, said Sonal Varma, chief economist for India at Nomura Holdings Inc. in late June. .

Rising oil prices will push the US and global economies into recession, Hansen said. Industrial metals will be affected by the economic downturn and gold is expected to rise despite a stronger dollar. The current shift away from fossil fuels globally would also intensify.

A war in the Middle East could hasten the abandonment of oil because it reminds people that they depend on a dangerous place, Fesharaki said. “Oil is going to die on its own within the next 10 to 15 years, that would just be a kick in the ass.” – Bloomberg


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