Will crude oil prices hit triple digits now? And what about the inflation effects? Wall Street will receive the first taste of investors' reactions to President Donald Trump's attacks on Iran when the futures market opens at 6 p.m. EST on June 22. All eyes will be on the stock market benchmark indexes, Treasury yields, precious metals, bitcoin, and, most importantly, oil and natural gas.
Iran So Far Away
What a difference a few weeks can make for the global energy markets. From the president’s inauguration to just before the Israel-Iran conflict escalated, oil prices had been down nearly 20%. Energy, a significant driver of price inflation, appeared to be at the bottom of the public’s economic concerns. However, now that the United States seems likely to be entangled in Middle East strife once again, oil could become a significant concern for businesses, consumers, and monetary policymakers.
In recent days, economists at major banks have estimated where oil prices are likely to head. Goldman Sachs offered a realistic estimate of a $10-a-barrel risk premium, meaning oil prices could trade near $90. Citibank analysts projected that crude might surge as much as 20% above pre-war levels. JPMorgan Chase and Barclays said prices could hit triple digits and climb well above $100 per barrel.
Market watchers have identified two key issues that could trigger higher prices: supply disruptions and a narrow waterway known as the Strait of Hormuz.
Hey, Tehran, Got Oil?
The conflict might result in the removal of Iranian oil supplies from international energy markets. Today, Tehran produces more than three million barrels of oil per day, ranking tenth in the world. This might lead to short-term disruptions in global energy flows if they go offline; however, several factors could help alleviate this issue.
First, virtually all of Iran’s exports are directed to China, so this would primarily be a headache for Beijing. Indeed, the Chinese regime may need to rely more on other trading partners for its energy needs, but this could be a regional issue rather than an international crisis observed at the onset of the Ukraine-Russia war.
Second, the Organization of the Petroleum Exporting Countries (OPEC) has a significant amount of spare capacity that could easily fill the three-million-barrel gap. The world’s largest oil cartel essentially admitted this in a recent report, noting that countries did not meet their production goals after ending the voluntary reduction this past spring out of fear that more output could weigh on prices in the open market.
Third, other countries produce far more than Iran, including the United States (13.5 million), Saudi Arabia (11 million), Russia (11 million), Canada (5.5 million), Iraq (4.7 million), and the United Arab Emirates (4 million).
Lastly, the global economy is expected to register a supply surplus this year and in 2026. Even if three million barrels are eliminated from the marketplace, it might not be enough to flip it into a deficit. Remember, the United States is still producing record levels of crude oil, reaching nearly 13.5 million barrels per day in April. OPEC, too, would unwind its production freeze at a much faster pace than initially expected, energy analysts predict.
Strait and Narrow
The Strait of Hormuz is a narrow waterway located between Iran and Oman. Despite its small size, it is a substantial hub for global oil and gas trading. In fact, according to the Energy Information Administration, the strait handles approximately 30% of the world's seaborne oil traffic and around 20% of liquefied natural gas (LNG) shipments.
A chorus of market experts contends that this is the bigger worry, especially considering that Tehran has threatened to block off this critical chokepoint for maritime energy traffic. Once again, a temporary closure would impact Asia much more than the United States, mainly because 80% of the oil and natural gas that travel through the strait is sent to Asian markets. Energy Information Administration (EIA) figures indicate that two-thirds of the oil that flowed through the strait was destined for China, India, Japan, and South Korea.
Europe, meanwhile, depends heavily on energy imports to power the continent. The eurozone would then need to shift its demand to alternatives, such as the United States, the Gulf producers, or, ironically, Russia. In the meantime, European countries would likely dip into their reserves. Although it is a new challenge for Europe, it might be manageable.
This is, of course, assuming that Iran either conducts economic suicide by following through on its threat or the US-Israeli militaries shut down the corridor.
Earlier this week, Iranian officials wreaked havoc in the region. "We’re already getting reports that Iran is jamming ship transponders very, very aggressively. These are not calm waters even though we have not had missiles flying in the straits," said Helima Croft, head of global commodity strategy at RBC Capital Markets, in a June 19 interview with CNBC's Fast Money.
Destabilization
The world has seen this before. Following the October 7, 2023, terrorist attacks in Israel, oil prices soared before coming back down. When tensions intensified months later, oil surged and then normalized. However, this time could be different since Israeli Defense Minister Israel Katz directed the military to bolster attacks on Iran to "destabilize the region" by focusing on the "foundations of its power."
While there are little signals that the Iranian regime is on the brink of collapse, experts say that any political destabilization could have near- and medium-term consequences for oil prices. And, if this occurs, the inflation flame could be rekindled, threatening President Trump's economic agenda and the Federal Reserve's dual mandate. Meanwhile, the evening of June 22 will be “yuge.”
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