CONFLICT AND CEASEFIRE IN THE MIDDLE EAST
The Middle East has historically been a focal point of global energy markets due to its large reserves of oil and natural gas. Thus, events that take place in the Middle East can impact the global supply of both commodities and influence market prices. Conflicts in the region often trigger sharp volatility due to fears of supply disruption. Conversely, calming tensions in the Middle East or peace agreements could ease pressures on prices due to the improved security of supply of energy. With Israeli and US strikes on Iran and then the recent ceasefire, markets have seen price movements in both directions.
- BACKGROUND: THE CONFLICT AND CEASEFIRE:
Concerns about Iran’s potential development of nuclear weapons have persisted for many months. Some reports claimed that the country could be only weeks away from developing a nuclear weapon, alarming Israel, a declared enemy of Iran. Those concerns were shared by other states, including the US. Iran claimed its program was intended to extend its nuclear power usage, but it began negotiations with the US in April. However, in June, the US stated that talks were failing and threatened to strike Iranian nuclear facilities, while Israel made the same commitment. On June 13, Israel struck Iran, triggering a conflict between the two countries. Days later, the US joined the Israelis, stating that they were successful in destroying Iran’s nuclear program. A US-brokered ceasefire took hold 12 days after the conflict began.
- OIL MARKET REACTION: SURGE AND PULLBACK
Crude Oil prices surged some 13%, driven by supply disruption fears. Although under oil sanctions, Iran is a major oil producer. It is also capable of launching attacks upon regional oil infrastructure. But the greatest ‘card’ Iran could play would be blocking a vital transit route, the Strait of Hormuz. While the conflict continued, traders watched for this escalation. But when the ceasefire was proclaimed, oil prices pulled back sharply to pre-conflict levels.
- NATURAL GAS REACTION: JUMP AND DECLINE
Natural gas prices jumped 6.8% to more than two-month highs during the conflict but have retreated almost 6% since a ceasefire was declared. While natural gas supplies are less plentiful in Iran and not a potential target, the potential closure of the Strait of Hormuz caused significant supply concerns.
- THE STRAIT OF HORMUZ: CRUCIAL CHOKEPOINT, WIDESPREAD IMPACT
The Strait of Hormuz is highly significant for global markets. Some 17 million barrels per day of oil, around 25% of global consumption and up to 20% of global Liquid Natural Gas trade pass through the strait.
Its potential closure would impact more than just energy. In such a scenario, global stock markets could see huge volatility since energy needed for production could become more expensive for companies, the price of airline tickets and gasoline prices could increase, negatively impacting tourism, and putting pressure on companies. Safe-haven instruments such as gold would have been expected to continue rising.
While Iran’s parliament was reported to have voted to close the strait, no shutdown from the Iranian leadership was ordered, and oil and natural gas prices have stabilised since.
- OUTLOOK: CAUTIOUS OPTIMISM FROM MARKETS
Though the early ceasefire hours were shaky, causing President Trump to express his displeasure on social media, it has held. Oil and natural gas prices are now stabilising, and gold prices are rising again. Markets appear to be pricing in peace in the region, while traders have moved on to other fundamental factors. Stock prices have jumped to all-time highs. The focus for oil and natural gas markets returns to US (and China) demand, the travel season, potential heatwaves (triggering high energy demand), and the US economy. General trade optimism continues for now.
Conclusion
The question remains: does the ceasefire mean the conflict in the Middle East is over? The long-term answer is no, violence continues between Israelis and Palestinians, and until a lasting agreement is made between countries like Israel and Iran, further outbreaks could take place. There is also debate on whether Iran’s nuclear program has been destroyed or whether international inspectors should verify it. If the country’s nuclear program remains intact, then it could be a matter of time before renewed military action, triggering further market volatility.