The Gaza-Israel war has added upside risk to oil prices and downside risk to ASX shares in the near term, according to AMP Head of Investment Strategy and Economics, Dr Shane Oliver.
Oil prices are rising again today. The WTI crude oil price is up 2.4% to US$88.72 a barrel. The Brent crude oil price is up 1.9% to US$91.60 a barrel.
In a website blog, Dr Oliver wrote that the conflict may lead to a surge in oil prices, especially if Iran becomes directly involved in supporting Hamas, as this could lead to global supply disruptions.
Dr Oliver said a spike in oil prices would "add to inflation, keep interest rates higher for longer and add to the risk of recession".
The AMP chief economist points out that oil prices rose last year to a high of $US123.70 on the back of the war in Ukraine. This was their highest level since 2008 when they peaked at $US145.
Since the Hamas attack, oil prices have risen about US$4 per barrel. This is consistent with normal oil price fluctuations, Dr Oliver said.
At the moment, the markets are not too concerned because we don't yet know if global oil supplies will be significantly impacted.
Dr Oliver said:
The key is whether oil supplies from major producers in the Middle East are impacted. Israel along with Lebanon & Syria are not big oil producers. And this is not a re-run of the 1973 conflict – now Arab countries are on the sidelines with many having better relations with Israel.
The main risk is if Iran, which backs Hamas and Hezbollah in Lebanon, is drawn into the war which could threaten its oil production (2.5% of global consumption), the flow of oil through the Strait of Hormuz (through which 20% of world oil flows) or even Saudi production (as Iran did in 2019).
Dr Oliver said his base case, with 70% probability, is that the conflict is limited to Israel and Gaza, with some involvement from Hezbollah in Lebanon and possibly other groups in Syria, but no direct Iran involvement.
He commented:
This would cause bouts of uncertainty in investment markets as the war escalates and expands but not enough to significantly threaten oil supplies.
In relation to share prices, he added:
If Iran stays out of the conflict and a major supply disruption is avoided, the impact [of the war] on shares on a 12-month view should be minimal.
But… if Iran jumps in, oil prices could go above US$150
However, Dr Oliver says the risk of Iran becoming directly involved is "significant and can't be ignored".
Dr Oliver explains:
Iran's backing of Hamas and its nuclear weapons breakout capability mean Israel has a strong incentive to attack Iran at some point (as does the US after the next election) resulting in a greater threat to world oil supplies. If this occurred, it could conceivably push oil prices above $US150.
… even if Iran does not directly become involved the risk of a further cut in Russian oil production (which accounts for about 10.5% of global oil production) is high given its desire to punish the West for supporting Ukraine. So, the risk of a further rise in oil prices is high.
Among the ASX 200 energy shares today, Woodside Energy Group Ltd (ASX: WDS) is outperforming.
Woodside released its third quarter activity report for the three months ending 30 September today.
The report revealed a 10% increase in sales volume from the prior quarter to 53.3 MMboe.
Revenue for the quarter was $3.26 billion. This was up 6% on the previous quarter despite a lower average realised oil price of $60.2/boe.
