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Financial markets

Markets Remain Calm Amid Middle East Tensions

Strategic Insights

— 2 min read

As financial markets used to be severely impacted by Middle East conflicts in the past, the current escalation between Iran and Israel has seen a remarkably composed response. The investment team has been monitoring the situation closely, and while it is a critical time in terms of potential global instability, calm thinking is required to navigate through the noise and panic. The market now demands more than just loud noises and is looking for real, sustained disruption to global oil supply, which has not occurred.

Key Takeaways:

  • The market's response to the current escalation between Iran and Israel has been remarkably calm, with Brent crude futures prices spiking by 7% but then drifting back down to around $73.
  • The fundamentals of the market remain strong, with OPEC+ sitting on around four million barrels per day of spare capacity, and the US remaining the world's top producer.
  • Iran's restraint in not closing the Strait of Hormuz, which handles one-fifth of the world's oil, has been driven by economic rationality, as 96% of its oil is sent through this chokepoint to China, an ally.
  • Investors have clocked this shift in market behavior, now pricing in a higher threshold for sustained disruption, and forecasts are painting scenarios where oil prices could spike to $90 or beyond $100 per barrel in worst-case situations.
  • However, these premiums are expected to fall back quickly once the situation stabilizes, both literally and metaphorically.
  • The danger lies in the potential for geopolitical turbulence, which is already driving up shipping insurance costs and freight rates, affecting sectors such as aviation, shipping, and logistics.
  • The so-called ceasefire may well be a pause button, not a peace deal, and regrouping is underway, making it a moment for long-term investors to prepare by diversifying and hedging.
  • The Middle East is still a powder keg, and calm is not the same as safe.

Statistics:

  • Brent crude futures prices spiked by 7% in the day and flirted around $78 (an intraday high of $13) but then drifted back down to around $73.
  • The US is the world's top oil producer, with Brazil and Guyana queuing up to fill any gaps.
  • Iran sends 96% of its oil through the Strait of Hormuz, mostly to China.
  • OPEC+ sits on around four million barrels per day of spare capacity.
  • Forecasting scenarios paint oil prices spiking to $90 or beyond $100 per barrel in worst-case situations.
  • Maersk's share price is down 7.5% from June 13's.

Sources:

  • "It's the calm thinking which ensures we look through noise and panic." - Peter McGahan, Chief Executive of Worldwide Financial Planning
  • "The market wants substance: real, sustained disruption to global oil supply, not sabrerattling or symbolic fireworks." - Peter McGahan, Chief Executive of Worldwide Financial Planning
  • "That narrow passage handles one-fifth of the world's oil. Shut it down, and the ripple effect would be global." - Peter McGahan, Chief Executive of Worldwide Financial Planning
  • "Tehran held back. Why? Partly because it sends 96% of its oil through that very chokepoint, mostly to China, an ally." - Peter McGahan, Chief Executive of Worldwide Financial Planning
  • "Sectors such as aviation, shipping and logistics are already feeling the pinch; Maersk's share price is down 7.5% from June 13's." - Peter McGahan, Chief Executive of Worldwide Financial Planning

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