The escalation of the conflict in Lebanon has reignited fears of disruptions to oil supplies in the Middle East. However, the extent of the impact on global markets and the potential for further escalation depends largely on how Israel responds, according to AMP chief economist Shane Oliver.
In his latest market note, the economist stressed that even if fighting continues to intensify in Lebanon, unless oil supplies are disrupted, from an investment perspective, “this remains only one another horrible war.”
“The key on this front is how Israel responds to the Iranian missile attack and whether it will lead to further escalation between the two,” Oliver said.
According to Oliver, four scenarios present themselves to the oil markets in the short term, the most unlikely being the absence of retaliation from Israel.
“This is unlikely, as Iran has announced, but if not, oil prices risk falling back to their levels before the Iranian attack. Of course, Israel might take some time to respond until it has dealt with Hezbollah,” Oliver said.
Another scenario could see Israel attack Iranian military targets and potentially secondary oil facilities such as refineries, in a “proportionate” manner.
In that case, oil prices would likely “rebound around current levels” but then stabilize, he said.
According to Oliver, such a scenario appears most likely – with a probability of 50 percent – with the United States likely to pressure Israel to be “proportionate”.
Alternatively, it is also possible that Israel could choose to retaliate by attacking Iranian oil production and export facilities or nuclear facilities.
“This could see oil prices rise by $10-$15 per barrel for several months as Iran’s exports of 1.75 million barrels per day are disrupted, but they would stabilize again as spare capacity from Saudi Arabia and the United Arab Emirates would close the gap,” Oliver said, placing a 30 percent probability on that scenario.
In Oliver’s fourth scenario, Iran responds to scenario three by attacking Saudi and UAE production and blocking the Strait of Hormuz through which 20 percent of the world’s liquid fuel supply passes each day.
“This could return oil prices to post-Ukraine invasion highs of around $120 a barrel or more, which could add 50 cents a liter or more to the petrol haul for Australian motorists” , Oliver said.
“This, in turn, would add about $18 to a household’s weekly gas bill, which would act as a ‘tax’ on spending that would depress retail sales. The impact is similar in other countries and a rise in oil prices could also threaten progress made in reducing inflation, although central banks, including the RBA, will focus on sub-par inflation. underlying.
But the fourth scenario, according to Oliver, would be akin to one where Iran “shoots itself in the foot” and, as such, has only a 10% probability.
As of Friday afternoon AEST, Brent crude oil futures are trading at around US$79.07 per barrel.
Commodity prices have risen about 11 percent since the Iranian missile attack and returned to levels seen in August, which Oliver says is just within the realm of “normal volatility” and not is not enough to have a significant impact on global growth or inflation.
