- Middle Eastern wars in the 1980s and 90s did not lead to prolonged oil shocks.
- Presently, global demand weakness is a bigger worry over supply constraints.
- Nonetheless, energy supply through the Straits of Hormuz could be potentially disrupted.
- The US could also be dragged into the conflict.
- Under such scenarios, energy prices will be much higher what's priced in presently.
Related Insights
Commentary: Middle East tensions and global implications
The uncertainty around the Israel-Iran conflict is considerable and many scenarios are plausible in the coming days, but hardly any of them is positive. Over a spectrum of adverse to extremely adverse outcomes, we note that the market is so far inclined to coalesce around the less dire possibilities.
Looking at the movement of risk assets so far, we find the market’s response centred around expectations of a short-duration conflagration, ending with a weakened Iran and an emboldened Israel, with some sort of settlement facilitated by the US. The fact that the Iraq-Iran war during the 1980s and associated disruptions to oil/gas supply/production did not cause 1970s -style oil shock may well be informing the market’s composure. Even the 1990/91 Iraqi invasion of Kuwait and subsequent oil field fires did not amount to a prolonged period of high oil prices. Coming at a time when global demand softness is a greater source of worry than supply tightness, the bar for a major oil rally is high.
While hoping the market’s view is the right one, which is that no oil shock is about to transpire, it is important to recognise the criticality of the conflict-afflicted region at stake. Iran sits at a global chokepoint of energy supply, disrupting which remains in its arsenal of options in the middle of an armed conflagration.
Gas and oil, crude and refined, are shipped from the ports of Persian Gulf through the narrow Straits of Hormuz from a number of countries, including Bahrain, Iran, Iraq, Kuwait, Qatar, Saudi Arabia (East coast), and the United Arab Emirates. About a fifth of the world’s oil consumption passes through the Straits. All of Qatar’s LNG exports go through it as well. Most the energy flowing from this region is bound for Asia.
Iran’s ability to restrict energy shipment through the Straits is substantial but constrained nonetheless, given the substantial US Navy presence, based out of Bahrain, in those waters. US also maintains a major air force base in Qatar.
Substantial presence and interest in the region also add to the risk of the US being drawn into the conflict. The desire to keep oil prices from spiking and keeping US allies secure may lead to a much broader conflict, with American troops being deployed in numbers not seen since the war against Iraq. Donald Trump only recently gave a speech about his desire to keep US military involvement out of the Middle East; he may have to reverse his position.
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