The rapid escalation of hostilities between Hamas and Israel has triggered a significant rise in crude oil prices. Whether broad market volatility will follow depends on Iran.
The most immediate impact on the market by the unexpected flare-up of violence in Israel, which began Saturday on the seventh and last day of Jewish Sukkot celebrations, was observed in oil markets.
Within hours of the initial attacks, the benchmark crude oil, Brent Crude, rose more than four dollars. On Monday morning, the price board showed a price of 87.27 dollars per barrel, up 3 percent from Friday’s close, after trading as high as 88.99 overnight. This rise highlights growing concerns about possible disruptions in global oil supplies.
Market reaction ‘surprisingly limited’
Peter Schiff, chief economist and strategist at Euro Pacific Capital, notes that the market reaction so far, however, is still “surprisingly limited” given Iran’s role in the conflict. Not only is the country the main supporter of Hamas, it is also one of the world’s largest producers of crude oil.
Any retaliatory action against Tehran risks hitting oil exports and disrupting the passage of ships through the strategically important Strait of Hormuz, a threat previously made by Iran.
According to Schiff, oil prices should rise significantly more. Government bonds and stock market futures should experience more pressure, he wrote on his “X-page”, the former Twitter.
“The attack on Israel will create more uncertainty in the market. Geopolitics will take centre stage again, and inflation and growth will take a step back,” said Gonzales Lardies, senior fund manager equities at Andorran-based Andbank.
According to Gonzales, a spike in volatility can be expected, with short-term fixed income becoming a safe haven again, while cyclical sectors will be in the spotlight, according to his market commentary.
Saudi deal
An important signal will come from Saudi Arabia. Washington recently tried to broker a deal between Israel and the Islamic country to normalise ties.
Saudi Arabia would formally recognise Israel in exchange for military support from the US and a commitment to increased oil production. The alleged US goal of the deal is to curb the recent surge in oil prices that sent US inflation soaring, putting pressure on a possible re-election of President Joe Biden. The chances of that attempt being nullified by the war in Israel are considerable.
It is extremely difficult to predict how this will unfold, notes Helima Croft, head of commodity strategy at RBC Capital Markets. According to Croft, the surprise attack in the region makes it unlikely that Israeli Prime Minister Benjamin Netanyahu will be willing to make concessions to the Palestinians, as the Saudi government might want.
‘Any progress made behind the scenes by the United States will be dramatically undermined by the actions of Iran and Hamas,’ says Brian Jacobsen, chief economist at Annex Wealth Management. ‘The potential loss of output is significant, but it will not be earth-shattering,’ he adds.
Kyle Rodda, senior market analyst at Capital.com, points out that events like this usually have ‘only a short-term effect’ on financial markets. Investors can potentially be nervous for several days until the risk of escalation has clearly diminished, he says.
While the US bond market was closed on Monday because of Columbus Day, investors will have to wait until Tuesday for an update on interest rates there.