Market Views: Israel-Gaza conflict's impact on oil prices
As the Israel-Gaza conflict erupted over the weekend, oil prices surged 4% earlier this week.
Military clashes between Israel and the Palestinian Islamist group Hamas fuelled fears that a wider conflict could hit oil supply from the Middle East.
The conflict threatens to follow 2022's script for markets for oil, energy and commodities when Russia invaded Ukraine.
Even as oil prices fluctuated rapidly, a darkening macroeconomic outlook intensified concerns about global demand. Higher oil prices could spur supply-side inflation in economies already feeling the pinch of relatively higher interest rates.
Against this backdrop, AsianInvestor asked asset managers what impact the latest conflict will have on oil and energy markets and how that could, in turn, affect investment performance and preferences of different sectors.
The following responses have been edited for clarity and brevity.
Fred Fromm, lead portfolio manager of Franklin Natural Resources Fund
Franklin Templeton
Although there shouldn’t be any immediate impact to crude oil supply, the conflict, at the least, lowers the probability that Saudi Arabia will bring oil back onto the market as part of a deal with the US to normalise relations with Israel in return for a defence pact.
While demand concerns were a primary driver of recent weakness in oil markets, the potential for such an accord had received increased attention over the past couple of weeks and was likely pressuring prices as well.
We believe the move in oil prices was justified, as a scenario that could have resulted in lower oil prices was taken off the table; but we do not expect a significant increase to levels that will impact global economic growth, i.e. to over $100/barrel of crude oil.
There are scenarios where this could occur, such as greater enforcement of sanctions by the US (moderate to likely) or a widening of the conflict to include Hamas supporter Iran (unlikely), but either of these are likely to come with assurances that other Organization of Petroleum Exporting Countries' members will meet any supply shortfalls with their ample excess capacity.
Ben Kirby, co-head of investments
Thornburg Investment Management
Although the initial market response has been muted, higher oil prices will likely result from further geopolitical instability.
Greater energy costs cramp a consumer’s ability to spend on other goods and services, increasing the possibility of a recession.
On the other hand, from a supply and demand perspective, we're also looking at how higher oil prices may eventually lead to lower demand. In addition, OPEC has the option to raise or lower production, so we will be monitoring how the Saudi government responds.
From a financial market standpoint, the initial transmission mechanism stemming from geopolitical shocks is in the energy markets.
As a result, we think that having exposure to integrated oil companies — ones with both refining and production as well as alternative sources such as LNG (liquefied natural gas) and renewables — today serve as an intriguing hedge.
Robert Samson, joint head of global multi-asset
Nikko Asset Management
From a capital market perspective, risk of further escalation must be priced, but we do not see it on a scale to have a significant impact on the price of oil – so far.
The key concern with the Israel-Hamas conflict is really about the potential escalation to include Iran, currently a low probability event.
While oil prices knee-jerked higher, the move has been modest compared to what one would expect if there was higher probability of Iran oil supply being disrupted.
After a pretty extended rally from May, oil prices have moderated since late September -- and about 1/3 was clawed back from Sunday and now oil prices are moving back to the downside.
We still like oil for tightness on the supply side and balanced demand.
Like oil, the rally on gold following the attack has been modest. While always serving as a good hedge against rising geopolitical risk, gold also benefits now also from being oversold driven by yields that may have reached a near-term top.
Elliot Hentov, head of macro policy research
State Street Global Advisors
The short-term fallout is limited as currently the conflict remains localised.
Hence, we believe near-term prices should continue to be driven by macro fundamentals, with recent OECD inventory growth triggering price declines.
A broader US slowdown could pull prices down further in coming months, whereas the geopolitics of energy has decisively shifted for the worse.
The nature of the Hamas attack is likely to change Israel’s calculus in the region, greatly increasing the country’s willingness to risk greater conflict in its aim to re-establish security.
This will need to be expressed as a gradually growing wider risk premium across energy markets.
On top of that, the fallout from a lack of Saudi-Israeli normalisation, the prospect of further sanctions on Iran, and the prolonging of fighting in Ukraine – as the Israel-Gaza war indirectly affects that outcome too – all mean that the supply side is structurally less elastic than before.
In short, if there is any demand pickup, supply will not keep up and prices are likely to spike, an event probable over the course of 2024.
Depending on timing, the inflation spillover could make global financial conditions tighter than necessary too.
Stephen Ellis, energy strategist
Morningstar
The oil markets today have more leverage to respond than in the past.
Saudi Arabia and Russia’s 1.3 million barrels per day of temporary cuts can be unwound relatively quickly.
In addition, higher interest rate costs, as Treasury bills hit some of the highest levels in decades last week, have sparked concerns about slowing global growth and, therefore, slowing oil demand.
Higher oil prices are beginning to cause some signs of demand destruction.
While the ability for US oil production to respond would be delayed, likely three to six months or more, higher oil prices would prompt private oil producers to increase activity as well.
Maximilien Macmillan, investment director of strategic asset allocation research
abrdn
Escalation of the conflict in the Gaza strip is generating a typical pattern of risk-off moves across asset classes, with equities selling off and the US dollar appreciating in a safe haven bid.
Notable exceptions to dollar strength are the Japanese yen, as a defensive currency that has cheapened strongly over the past two years, and the Norwegian krone, which benefitsfrom higher oil prices.
This geopolitical shock is sending oil prices higher, as the market is pricing at the margin, the possibility of an escalation that would see Iran drawn into the conflict.
That follows a three-month period of strong oil price appreciation, which had helped push government bond yields higher and equities lower.
Indeed, the soft landing narrative and associated positive pattern of returns across asset classes is conditional upon the continued fall in inflation.
Oil rising and remaining high challenges this environment and may alter the prospective setting of monetary policy in a hawkish direction.
Safe haven government bonds in the US are trading sideways, a sign of conflicting influences.
On the one hand, a shock to sentiment generates demand for safety; on the other hand, upward pressure on oil is typically associated with higher yields, due to the feedthrough to inflation.
We like the dollar for its defensive properties to this type of shock, and are running low amounts of corporate risk and duration, till we see evidence of this bout of deteriorating sentiment and hawkish rates repricing ending.