Our central scenario is that a major escalation of tensions in the region and a sustained increase in oil prices are unlikely.

Tensions between Israel and Iran have been escalating over recent weeks. Against a backdrop of robust global demand and OPEC+ output cuts, these heightened tensions have applied further upward pressure to oil prices, with Brent crude prices breaking above $90 per barrel for the first time since October 2023.

Scenarios and implications for oil markets

Our central scenario is that a major escalation of tensions in the region and a sustained increase in oil prices are unlikely.

First, Iran’s oil production is approximately 3 million barrels per day (Mb/d), or around 4% of the global total. If, for any reason, Iranian oil exports were disrupted, capacity exists to offset this loss. OPEC’s current spare capacity stands at around 4 Mb/d, of which 3 Mb/d sits with Saudi Arabia (the swing producer in global oil markets).

While many OPEC producers do benefit from rising oil prices, they are also mindful of the global economic stress caused by higher prices, as well as the prospect of a meaningful fall in prices in a global recession.

Second, there are other reasons why regional players have an interest in keeping the conflict contained. The Gulf states are in the process of transforming their economies away from a reliance on oil, and this transformation requires a sustained absence of hostilities in the region.

The Gulf states’ relations with Israel have improved since previous episodes of conflict in the Middle East. Israel now has long-standing diplomatic agreements with Egypt and Jordan, and normalised relations with the UAE, Bahrain and Morocco in 2020. Saudi Arabia was also considering formal ties with Israel last summer, though no further progress has since been made. Saudi Arabia and Jordan aided Israel in neutralising a recent Iranian attack.

Any escalation involving a closure of the Strait of Hormuz would likely lead to a more problematic increase in the global oil price, given 30% of the world’s seaborne oil trade passes through the strait. Indeed, all shipping traffic from the Gulf countries pass through Hormuz – including crude oil, oil products and liquefied natural gas exports from Iran itself.

However, this is not our central scenario. A closure of the strait by Iran would threaten its relations with China which, given current Western sanctions on Iran, buys the overwhelming majority of Iranian oil exports. In fact, all Iran’s oil exports are transported via the sea, so its own trade depends heavily on the free passage of goods and vessels through the seaway. Any move to block the strait would damage Iran’s own economy and also likely antagonise its Gulf neighbours. It is also worth noting that despite several threats of closure over the past few decades, the Strait of Hormuz has never actually been blocked.

Implications for global growth, inflation and interest rates

Amid generally sticky developed world inflation prints in recent months, markets have been considering what the prospect of higher oil prices might mean for interest rates and the broader economy.

How central banks respond to cost shocks, such as a rise in oil prices, depends on the state of the economy. If the economy is weak and running below capacity, cost shocks can depress consumption and lead to further weakness in activity. In this case, cost shocks can prompt monetary easing to avoid deflationary pressures emerging.

But when economies are strong, with low unemployment and little spare capacity, cost shocks can generate increased wage demands and sustained inflationary pressures. In this scenario, monetary policy is more likely to be tightened or kept restrictive to limit further price rises.

We view today’s economic picture as more similar to the latter scenario, with US growth resilient and labour markets tight across the developed world. Thus, we see any sustained increase in the oil price as likely to add to inflation stickiness, and therefore to modestly delay the speed of monetary easing from currently tight levels.

However, our expectation based on the current situation is that the oil price impact of recent Middle East tensions is likely to be fairly contained. We would therefore expect these tensions to dent, rather than derail, the broader ‘recovery’ narrative.

The Market Insights programme provides comprehensive data and commentary on global markets without reference to products. Designed as a tool to help clients understand the markets and support investment decision-making, the programme explores the implications of current economic data and changing market conditions. For the purposes of MiFID II, the JPM Market Insights and Portfolio Insights programmes are marketing communications and are not in scope for any MiFID II / MiFIR requirements specifically related to investment research. Furthermore, the J.P. Morgan Asset Management Market Insights and Portfolio Insights programmes, as non-independent research, have not been prepared in accordance with legal requirements designed to promote the independence of investment research, nor are they subject to any prohibition on dealing ahead of the dissemination of investment research.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not a reliable indicator of current and future results. J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our privacy policies at https://am.jpmorgan.com/global/privacy. This communication is issued by the following entities: In the United States, by J.P. Morgan Investment Management Inc. or J.P. Morgan Alternative Asset Management, Inc., both regulated by the Securities and Exchange Commission; in Latin America, for intended recipients’ use only, by local J.P. Morgan entities, as the case may be.; in Canada, for institutional clients’ use only, by JPMorgan Asset Management (Canada) Inc., which is a registered Portfolio Manager and Exempt Market Dealer in all Canadian provinces and territories except the Yukon and is also registered as an Investment Fund Manager in British Columbia, Ontario, Quebec and Newfoundland and Labrador. In the United Kingdom, by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other European jurisdictions, by JPMorgan Asset Management (Europe) S.à r.l. In Asia Pacific (“APAC”), by the following issuing entities and in the respective jurisdictions in which they are primarily regulated: JPMorgan Asset Management (Asia Pacific) Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited, each of which is regulated by the Securities and Futures Commission of Hong Kong; JPMorgan Asset Management (Singapore) Limited (Co. Reg. No. 197601586K), this advertisement or publication has not been reviewed by the Monetary Authority of Singapore; JPMorgan Asset Management (Taiwan) Limited; JPMorgan Asset Management (Japan) Limited, which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association, Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated by the Financial Services Agency (registration number “Kanto Local Finance Bureau (Financial Instruments Firm) No. 330”); in Australia, to wholesale clients only as defined in section 761A and 761G of the Corporations Act 2001 (Commonwealth), by JPMorgan Asset Management (Australia) Limited (ABN 55143832080) (AFSL 376919). For all other markets in APAC, to intended recipients only. For US only: If you are a person with a disability and need additional support in viewing the material, please call us at 1-800-343-1113 for assistance.
Copyright 2024 JPMorgan Chase & Co. All rights reserved.
Image source: shutterstock