Iran-Israel: Why Oil Prices have Surged 10%
Global oil markets have jolted, with Brent crude jumping more than 10% after Israel confirmed its forces struck Iranian soil on June 13.
The operation, described by Israeli authorities as a "pre-emptive strike" tied to Iran's nuclear programme, has reignited concerns over the stability of oil supply chains in a region critical to the world's energy flow.
The initial spike in Brent crude saw prices hit their highest level since January, at US$73.12 a barrel.
The American Nymex exchange reflected a similar trend, with oil reaching US$73.20.
Such increases have raised alarms over global energy supply disruptions, particularly if the conflict escalates.
What is Brent crude?
Brent Crude serves as a benchmark that determines the pricing for approximately two-thirds of the global oil trade.
Known for its light, sweet characteristics, Brent is ideal for refining.
Historically sourced from the Brent field in the North Sea, its composition now includes oil from Forties, Oseberg, Ekofisk, Troll (BFOET) and Midland oil from Texas.
Despite its European base, Brent's pricing influences oil trade across Europe, Africa and the Middle East.
The impact
Energy traders responded quickly to these developments.
"It's an explosive situation, albeit one that could be defused quickly as we saw in April and October last year, when Israel and Iran struck each other directly," Vandana Hari of Vanda Insights told the BBC.
She added: "It could also spiral out into a bigger war that disrupts Mideast oil supply."
The immediate impact was observed in global markets, with the FTSE 100 in London dropping 0.6%, having reached a record high the prior day.
In Asian markets, Japan's Nikkei fell by 1.3%, South Korea's Kospi by 1.1% and Hong Kong's Hang Seng by 0.8%.
In Europe, market indices in Germany, France, Italy and Spain fell by more than 1%, while US futures signal further declines ahead.
Allen Good, Director of Equity Research at Morningstar, explains: "We expect, absent a wider war, today's rise in prices will likely prove to be a sell-the-news event.
"Oil markets remain amply supplied with OPEC set on increasing production and demand soft. US production growth has been slowing, but could rebound in the face of sustained higher prices.
"Meanwhile, a larger war is unlikely," Allen predicts. "The Trump administration has already stated it remains committed to talks with Iran.
"We expect a response from Iran, but it will likely be modest, like past retaliatory strikes and not spark a wider war. Ultimately, fundamentals will dictate price, and they do not suggest much higher prices are necessary. Although the global risk premium could rise, keeping prices moderately higher than where they've been much of the year."
Beyond oil, the conflict has broader implications.
Gold, traditionally viewed as a safe investment during geopolitical tensions, has increased by 1.5% to US$34,434 per ounce, nearing its record from April.
The Swiss franc and Japanese yen are gaining, each by 0.4% against the dollar, while the US dollar index saw a 0.5% rise.
All eyes on the Strait of Hormuz
At the heart of current concerns is the Strait of Hormuz, a narrow yet essential maritime route that connects the Gulf to the Arabian Sea.
This passageway accommodates about a fifth of global oil and a significant portion of liquefied natural gas trade.
Situated between Iran to the north and Oman and the UAE to the south, any Iranian retaliation targeting this area could severely impact global energy supply.
"There’s not just the outlook for Iranian exports that’s a concern but also the potential for disruption to shipping in the Persian Gulf’s Strait of Hormuz," says Derren Nathan of Hargreaves Lansdown.
"It’s a key route for about 20% of global oil flows and an even higher proportion of liquified natural gas haulage."
Dozens of tankers navigate this narrow route at a time, transporting crude and gas from Middle Eastern producers to global markets.
Any disruption would affect the flow of millions of barrels daily and could tighten an already fragile global supply chain.
Wider investment impact
This geopolitical escalation impacts more than just energy supply; aviation is an industry that has been affected too.
Airlines, responding to regional airspace concerns, have seen shares in IAG and easyJet decline by more than 4%.
Conversely, defence stocks like BAE Systems have risen nearly 3% as investors weigh the implications of a prolonged conflict.
Meanwhile, BP and Shell have benefited from approximately 2% gains due to oil price dynamics, though Morningstar points out limited enthusiasm due to prevailing negative perceptions of the fossil energy industry.
"With sentiment negative towards the sector, energy is currently the cheapest sector in Europe," explains Michael Field of Morningstar.
For ESG funds, the timing is challenging as Kenneth Lamont, Principal for Morningstar's Manager Research Department, notes the widening divide between ESG-aligned portfolios and traditional sectors like defence and fossil fuels.
"A serious military escalation in the Middle East could deal another blow to ESG funds, which have already been battling against poor performance rising anti-ESG sentiment - particularly in the US," he explains.
"Traditional sectors often excluded from ESG portfolios, such as defence and fossil fuels, are likely to benefit, widening the performance gap. The recent EMSA ESG naming guidelines, which emphasise climate objectives for sustainable funds and have further curtained fossil fuel exposure, further cementing this divide.”
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