World markets on oil watch as Middle East stress flare
LONDON: Global benchmark Brent crude oil is up around 20 percent up until now in June, and set for its greatest month-to-month dive given that 2020 as Zionist-Iran tensions flare-up. Although relatively contained, the rise has not gone unnoticed just three years after Russia’s invasion of Ukraine triggered a surge in energy prices that ramped up global inflation and sparked aggressive interest rate hikes. Here is a look at what rising oil means for world markets. How high? Oil prices have crept rather than surged higher with investors taking comfort from no visible disruption to oil flows. Still, focus. The premium of first-month Brent crude futures contract to that for delivery six months later this week rose to a six-month high as investors priced in an increased likelihood of disruptions to Middle East supply. It remained elevated on Friday. Trading at around $77 a barrel, Brent crude futures are below 2022’s $139 high but nearing pain points. “If oil goes into the $80-100 range and stays there, that threatens the global economy,” said ABN AMRO Solutions CIO Christophe Boucher. “We are just below that threshold.” Supply shock? Traders have an eye on shipping, typically seen as a key energy bellwether. About a fifth of the world’s total oil consumption flows through the Hormuz Strait between Oman and Iran. Disruption here could push oil above $100, analysts say. Blocked shipping routes would compound any supply shock, as any increased output from OPEC+ might not reach the global market, said hedge fund Svelland Capital director, Nadia Martin Wiggen. The Organization of the Petroleum Exporting Countries’ latest monthly oil market report found production by the wider OPEC+ group rose in May by 180,000 barrels per day to 41.23 million bpd, less than the 411,000-bpd hike required by the group’s increase in its May quotas. Wiggen is monitoring freight rates closely. “So far, freight rates indicate that China, with the world’s largest spare refining capacity, hasn’t started panic buying oil on supply concerns,” she said. “When China starts to buy, freight rates will rise, and world’s energy prices will follow.” No oil, no growth Rising oil prices raise concerns because they can lift near-term inflation and hurt economic growth by squeezing consumption. High oil prices work like a tax, say economists, especially for net energy importers, such as Japan and Europe, as oil is hard to replace in the short term. Lombard Odier’s chief economist Samy Chaar said that sustained oil prices above $100 would shave 1 percent off global economic growth and boost inflation by 1 percent. Unease heightened after Zionist entity launched its attack on Iran a week ago. An initial rally in safe-haven bonds quickly dissipated as focus turned to the inflationary impact of higher oil. The euro zone five-year, five-year forward, a closely-watched gauge of market inflation expectations, climbed to its highest level in nearly a month.– Reuters “In the United States, $75 oil is enough to, if it’s sustained, increase our CPI forecast by about half a percentage point by the year end, to go from 3 to 3.5 percent,” said RBC chief economist Frances Donald. Turkey, India, Pakistan, Morocco, and much of Eastern Europe where oil is heavily imported are set to be hit hardest by the rise in crude prices. Those that produce it – Gulf nations, Nigeria, Angola, Venezuela, and to some extent Brazil, Colombia, and Mexico should get a boost to their coffers, analysts say. A shift is happening in the dollar. In recent years, the currency has risen when oil rallies, but it has had only limited support from oil’s latest increase, with a weekly gain of 0.7% =USD. Analysts expect the dollar’s downtrend to resume, given expectations of limited Middle East risks in the interim and underlying bearish sentiment. It has weakened around 9 percent so far this year against other major currencies, hurt by economic uncertainty and concern about the reliability of US President Donald Trump’s administration as a trading and diplomatic partner. No doubt, a weaker dollar soothes the sting from higher oil, which is priced in dollars. “For oil-importing nations, the dollar’s decline offers some relief, alleviating the impact of soaring oil prices and mitigating broader economic strain,” UniCredit said. In the absence of an oil-supply shock, world stocks are content to hover near all-time highs. “Investors want to look past this until there’s a reason to believe this will be a much larger regional conflict,” said Osman Ali, Goldman Sachs Asset Management’s global co-head of Quantitative Investment Strategies. Gulf markets sold on the initial news, then stabilized somewhat, buoyed by the higher oil prices. US and European energy shares, particularly oil and gas companies have outperformed as have defense stocks. Zionist stocks up 6 percent in a week have been the biggest outperformer. Stocks of oil consumers have been the worst hit, airlines stand out.– Reuters
Oil prices have crept rather than surged higher with investors taking comfort from no visible disruption to oil flows. No oil, no growth Rising oil prices raise concerns because they can lift near-term inflation and hurt economic growth by squeezing consumption. High oil prices work like a tax, say economists, especially for net energy importers, such as Japan and Europe, as oil is hard to substitute in the short term. In recent years, the currency has risen when oil rallies, but it has had only limited support from oil’s latest increase, with a weekly gain of 0.7% =USD. “For oil-importing countries, the dollar’s fall offers some relief, reducing the impact of soaring oil prices and mitigating broader economic strain,” UniCredit said.
