Escalating conflict in Lebanon has renewed fears of oil supply disruptions in the Middle East, however, the extent of the impact on global markets and the potential for further escalation largely depends on the way Israel responds, according to AMP’s chief economist, Shane Oliver.
In his latest market note, the economist highlighted that while fighting continues to intensify in Lebanon, unless oil supplies are disrupted, from an investment perspective, “it remains just another horrible war”.
“The key on this front is how Israel responds to Iran’s missile attack and whether that results in further escalation between the two,” Oliver said.
According to Oliver, four scenarios face oil markets in the near-term, the most unlikely of which remains no retaliation from Israel.
“This is unlikely, as it has said it will, but if it doesn’t, oil prices are likely to fall back to where they were before Iran’s attack. Of course, Israel may just take a while to respond until after it deals 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 this instance, oil prices would “likely bounce around current levels” but then settle back down, he said.
According to Oliver, such a scenario appears as the most likely – at a 50 per cent probability – with the US likely to pressure Israel to be “proportionate”.
Alternatively, there is also the possibility that Israel chooses to retaliate by attacking Iranian oil production and export facilities or nuclear facilities.
“This could see oil prices spike $US10–15/barrel for several months as Iran’s 1.75 million barrels per day of exports are disrupted but would settle back down again as Saudi/UAE spare capacity makes up the gap,” Oliver said, placing a 30 per cent probability on this scenario.
Under Oliver’s fourth scenario, Iran retaliates to scenario three by attacking Saudi/UAE production and blocking the Strait of Hormuz through which 20 per cent of global liquid fuel supply flows each day.
“This could push oil prices back to the post-Ukraine invasion highs around $US120/barrel or more which could add 50 cents a litre or more at the petrol bowser for Australian motorists,” Oliver said.
“This, in turn, would add about $18 to the weekly household petrol bill which would act as a ‘tax’ on spending depressing retail sales. It’s a similar impact in other countries and a surge higher in oil prices could also threaten progress in getting inflation down although central banks, including the RBA will focus on underlying inflation.”
But the fourth scenario, according to Oliver, would be akin to Iran “shooting itself in the foot”, and as such, only carries a 10 per cent probability.
As at Friday afternoon AEST, Brent crude oil futures sit at around US$79.07 a barrel.
The commodity is up around 11 per cent since Iran’s missile attack and back to levels seen in August, which, according to Oliver, is just in the realm of “normal volatility” and not enough to significantly impact global growth or inflation.
