...the trading floor philosophy of 'It Doesn't Matter Until It Matters' reflects an apathy to risk outcomes with not wanting to be too presumptive and preemptive.
...common assumption is that a full blown war would re-ignite the printing press and give the economy a boost, except that a current weakening and fragile economy can ill afford further protracted higher for longer interest rates that would become necessary to stem heightened inflationary forces attributable to higher oil prices and supply chain shocks that would result from the conflict. How far will it go?
For nearly a year since the Hamas attack on Israel on Oct. 7 and the start of the fighting in Gaza, investment strategists have warned that a wider war could break out in the Middle East, crimping the world’s oil supply and sending shock waves throughout the global economy.
The markets have generally shrugged off the potential of a broader conflict: The price of oil has remained largely subdued, with traders reassured by the world’s plentiful supply.
But after Iran launched a barrage of missiles at Israel on Tuesday, oil prices began to rise as the market appeared to factor in the risk of a growing regional conflict. After President Biden said on Thursday that there had been “discussions” about support for an Israeli attack on Iran’s oil facilities, the price of Brent crude, the global oil benchmark registered its biggest weekly gain in more than a year.
“Investors are finally paying attention to the Middle East after having decided it wasn’t going to move the needle,” said Tina Fordham, a former chief global political analyst at Citi who now runs an independent consultancy.
“It’s not a perfect storm yet,” she said, “but it’s a constellation of risks coming together at a time when market systems still haven’t gotten comfortable that we’ve avoided a hard economic landing.”
“The risk is not zero, which means it’s high enough to consider different scenarios that range from all-out conflict that curtails energy access to a peaceful off-ramp,” said Ronald Temple, the chief market strategist for Lazard’s financial advisory and asset management business.
Oil prices are the biggest global economic risk factor. Iran produces about 2 percent of the world’s oil supply, which it sells mostly to China. But the greatest liability to the global economy would be if Tehran blocked access to the Strait of Hormuz, which connects the Persian Gulf to the Arabian Sea, because about 20 percent of the world’s oil passes through there.
Oil prices are still lower than a year ago, mostly because the United States and other countries have ramped up production and demand in China, the world’s biggest oil importer, has continued to fall as its economy has slowed. Saudi Arabia and seven other oil producers have also agreed to unwind some of their production cuts, though the plan has been delayed.
“Even though there’s a lot of oil in the world right now, a massive regional war could take more oil offline than there is spare capacity,” said Matt Gertken, the chief strategist at BCA Research.
That could fuel inflation. Oil prices are a major component of food prices, for example. At a moment when much of the world is starting to get inflation under control, a sustained increase in oil prices could set off a new bout and potentially affect interest rates.
Analysts at Capital Economics suggested that oil prices would most likely need to reach $90 a barrel to become a factor for central banks. As of Friday, the price of Brent crude was $78 per barrel.
Traders and energy companies are making moves. “I think it’s pretty clear that investors are already hedging their risk exposure,” said Michael Brown, a senior research strategist at the Australian brokerage Pepperstone, pointing to indexes that measure how much investors are buying options to limit their losses.
Stephen Schork, a trader who advises heavy industrial users of oil, like fertilizer or natural gas companies, on how to hedge risks, says it’s “imperative to act now” to protect against a jump in prices. He is recommending that they use a specific options strategy known as a “zero cost collar.”
Companies are watching for how the conflict affects the U.S. election, the outcome of which could have huge consequences for trade relations, taxes and regulation. Neither a spike in oil prices nor a heightened sense of global turmoil would help Vice President Kamala Harris’s campaign.
For most companies, the potential effect on the election is “perhaps the biggest potential impact of the conflict,” Theodore Bunzel, the head of Lazard Geopolitical Advisory, said.
Markets have tended to shrug off geopolitical risk. Despite the war in Ukraine and the fighting in Gaza, stocks have been at historic highs. Oil prices spiked after Israel and Iran exchanged blows in April, but quickly fell.
Quincy Krosby, the chief global strategist for LPL Financial, says the philosophy on trading room floors, which is echoed by companies, tends to be, “It doesn’t matter until it matters.”
But, she says, at some point it does matter: “The question is how far does it go?”
— Sarah Kessler
