Crude Oil Rises Amidst Growing Tensions Between Iran and the US
The price of crude oil jumped above 70 USD a barrel on Monday the 6th of January for the first time since September 2019 amidst growing concerns that the US airstrike that wiped out the Iranian army commander could spark a full-blown conflict between the two nations which could then impact global energy supplies.
Brent crude reached 70.73 USD, the highest level after the two drone attacks on Saudi Aramco’s oil facility in September. Stock markets in Europe also felt the impact of the escalating tensions between the US and Iran, with the FTSE 100 down 0.6 percent.
Roughly 20 percent of the world’s oil supply is funneled through a corridor between the Persian Gulf and the Gulf of Oman, known as the Strait of Hormuz. This pathway is regularly targeted by Iran as a way of disrupting the price and supply of global crude oil. In July 2019, Iranian military forces seized two oil tankers, one of which was registered in Britain.
A protracted rise in the price of crude oil could increase the threat of a global economic recession and could increase the cost of petrol for consumers.
On the other hand, economists at Goldman Sachs have questioned whether the price of crude oil will continue to rise above 70 USD a barrel due to stable production rates of crude beyond the Middle East. Brent crude retracted below 69 USD a barrel on January 6th in late afternoon trading following its highest level since September 2019.
Market analysts from UBS have suggested that the global crude oil market will be well supplied during 2020. This optimism is partly down to increasing production from countries such as Norway and the US, which would, therefore, deter any sudden price surges.
J.P.Morgan’s Chief Global Strategist, Dr. David Kelly, wrote the following in an article on January 6th entitled Understanding Underreaction.
“In the week ahead, Americans will continue to debate the wisdom of the U.S. action. However, from an investment perspective, a more relevant question is why, at least initially, the markets didn’t react more. After all, Iranian retaliation could involve further attacks on oil production or shipping and Iran could also retaliate in a number of other ways that could damage the U.S. economy or markets. Furthermore, any U.S. response to Iranian retaliation could also have damaging and unpredictable impacts.”
“Part of the reason for the calm may lie in the changing structure of global oil markets and how the U.S. economy has become less vulnerable to energy price swings. However, a broader answer involves both psychological and financial forces that have endowed the stock market with greater resilience as this bull market has aged.”
“On the oil issue, it is now almost 50 years since OPEC first really flexed its muscles by cutting production and embargoing oil supplies to the United States and other countries that had supported Israel in the Yom Kippur war. This triggered both surging inflation and a deep recession and, since then, oil price shocks have played a leading or supporting role in three further U.S. recessions.”
“However, over the past two decades, the growth of shale oil drilling has transformed the United States from a huge net importer of oil to a situation of self-sufficiency. In the third quarter of 2008, the U.S. devoted over 3% of GDP to buying foreign oil. In the third quarter of last year, net oil imports amounted to just 0.05% of GDP.”
Geopolitical tensions have also sparked an increase in gold prices, which investors usually rely on as a risk-free alternative during times of uncertainty and unrest.
The price of gold rose to a six-year high on January 6th after it reached 1,575 USD an ounce. Market analysts have suggested that the market price for gold could rise further should the greenback weaken against other major currencies.
The price of petrol increased by nearly 0.3 pence a month ago. Consumers are paying a higher price for fossil fuels because of geopolitical tensions and growing pressure from government officials and environmental activists for immediate action to tackle climate change.
Dr. Kelly concluded his article by suggesting that: “So while markets may have underreacted to increased Middle-East tension, investors should make sure that they don’t and pay particular attention to valuations in markets where a shrinking number of assets could truly be described as cheap.”
To read the full article click here.
Will electrification take over the automotive sector in 2020?
Car manufacturers in Europe are bracing themselves for a shift towards electric vehicles, as some of the world’s largest carmakers have started working towards producing vehicles with zero carbon emissions.
With new EU regulation that fines car manufacturers for vehicles that emit 95 grams or more of carbon dioxide per kilometer. If a car company breaches the limit, they will be fined 95 USD for every gram over the limit, which will then be multiplied by the number of sales.
Sales of electric vehicles are expected to be less than traditional combustion engine and hybrid cars. However, with new incentives and stringent regulations on carbon emissions, car manufacturers are likely to lower the price of electric cars as they compete with one another to win over consumers.