ISRAEL-IRAN CONFLICT ROILS OIL PRICES, OPEC AND THE GLOBAL ECONOMY
The recent outbreak of war between Israel and Iran has significantly unsettled global energy markets, with profound implications for oil prices, the global economy, and Middle Eastern power dynamics, particularly within the domain of the Organization of the Petroleum Exporting Countries (OPEC) and the oil sector.
Background of the conflict and immediate market reactions
The conflict began when Israeli airstrikes targeted Iranian military and nuclear facilities, including critical oil and gas infrastructure such as the South Pars gas field and the Shahr Rey oil refinery. Iran responded with missile attacks on Israeli targets, escalating hostilities over several days.
The United States (US) has played a notable role, with US President, Donald Trump, urging Iran’s “unconditional surrender” and deploying additional military assets to the region, raising fears of broader US involvement.
This escalation has triggered immediate volatility in oil markets, with Brent crude and West Texas Intermediate (WTI) prices surging by over 4% from the start of the conflict, seeing Brent reaching around $76/barrel and WTI surpassing $75/barrel. Since the start of the conflict, oil futures have risen approximately 10%, reflecting market anxiety over potential supply disruptions.
Impact on oil prices and supply concerns
Iran is OPECʼs third-largest oil producer, extracting about three million barrels per day. Despite sanctions limiting its exports, Iran remains a significant player, especially in supplying China and India. The conflict threatens Iranian oil production and shipping routes, notably the Strait of Hormuz, a critical chokepoint through which roughly 20% of the worlds maritime oil trade passes.
The Strait of Hormuzʼs strategic importance cannot be overstated. Any disruption – whether due to military action, electronic interference affecting navigation systems, or blockades – could severely constrain global oil supply. Recent incidents, such as the collision and fire involving two oil tankers near the strait, have heightened these concerns.
While OPEC members possess some excess production capacity that could theoretically offset Iranian supply losses, the risk of a prolonged or expanded conflict introduces significant uncertainty. Analysts warn that oil prices could spike to $100/barrel or even $120/barrel if supply through the Strait of Hormuz is disrupted. Such a price shock would reverberate through global markets, impacting inflation, consumer costs, and economic growth worldwide.
Ripple effects on the global economy
Rising oil prices have immediate and far-reaching consequences. Higher crude costs translate into increased transportation and manufacturing expenses, feeding into broader inflationary pressures. This dynamic can slow economic activity by reducing consumer purchasing power and increasing production costs.
Financial markets have already reacted negatively. US stock indices such as the S&P 500 and Nasdaq have declined amid fears of escalating conflict and economic uncertainty, while investors have signalled their risk aversion by moving to safer assets like government bonds and gold.
Countries that are heavily reliant on oil imports, including both developed and developing economies, face the prospect of higher energy bills that could exacerbate inflation and a slower recovery from recent global disruptions. Even nations not directly dependent on Iranian oil, such as Australia, are expected to experience rising fuel prices due to the global nature of oil markets.
Changes in Middle Eastern power dynamics and OPEC
The conflict also has the potential to reshape power relations within the Middle East and influence OPECʼs internal dynamics. Iran’s role as a major oil producer and its strategic position in the Gulf give it considerable leverage. However, ongoing hostilities and potential sanctions or production disruptions could weaken Iran’s influence.
In contrast, Saudi Arabia and other Gulf states might consolidate their positions as reliable suppliers of oil. OPEC could face pressure to increase production to stabilise markets and prevent price spikes that harm global economic stability. However, this balancing act is further complicated by geopolitical rivalries and the risk that escalating conflict could draw in other regional producers, further destabilising supply.
The vulnerability of global energy supply chains to geopolitical risks centred in the Middle East may prompt consumer nations and companies to accelerate diversification efforts, including investments in alternative energy sources and strategic petroleum reserves, to mitigate future shocks.
While OPECʼs role becomes critical in managing supply to prevent excessive price spikes, the situation remains fluid, with the potential for escalation or de-escalation influencing market outcomes.
Ultimately, this conflict highlights the persistent vulnerability of global energy markets to geopolitical tensions and the interconnectedness of regional conflicts and global economic stability.
MARKETS MOVES IN A NUTSHELL
Key themes for the week:
- Bond yields steady as world watches Middle East
- DAX Index fell by 1.1%, closing at its lowest level since early May
- Oil up 19% for the month as Middle East conflict raises supply concerns
- Dollar set for a weekly gain
Bonds
US government bond yields have remained steady this week, with the 10-year Treasury note yielding around 4.39%. Investors have shown a preference for safe haven assets in response to escalating tensions in the Middle East and uncertainty about the US economic outlook. The US Federal Reserve (Fed) kept interest rates unchanged on Wednesday, while warning that new tariffs could push inflation higher.
In the United Kingdom (UK), the 10-year Gilt yield stayed near 4.5%, as markets digested both geopolitical risks and the Bank of England’s (BoE’s) decision to hold rates at 4.25%. The policy decision was split, with three members favouring a cut, reflecting differing views on inflation and growth.
In Germany, the 10-year Bund yield hovered around 2.5%, with investors closely watching both the situation in the Middle East and expectations for a rate cut by the European Central Bank (ECB) later in the year.
South Africa’s 10-year bond yield rose to 10.13%, a slight increase from the previous session. Over the past month, the yield has dropped, but it remains higher than a year ago, indicating ongoing concerns around risks associated with South Africa.
Equities
US stock futures declined as investors reacted to the possibility of US military involvement in the Middle East, following reports that a decision on action against Iran could be made soon. This uncertainty, combined with the Fed’s cautious approach to interest rates and economic projections, has weighed on sentiment. Despite this, the S&P 500 and Nasdaq Composite have managed to post modest gains for the week, while the Dow Jones Industrial Average is slightly lower.
In Germany, the DAX Index fell by 1.1%, closing at its lowest level since early May, as concerns over potential US intervention and ongoing conflict between Israel and Iran dominated market attention. Major German companies, including e-commerce company, Zalando; research and pharmaceutical manufacturer, Sartorius; software giant, SAP; industrial technology firm, Siemens Energy; global semiconductor firm, Infineon; and global sportswear brand, Adidas, experienced notable declines.
In South Africa, the JSE All Share Index dropped to 94,915 points, a small decrease from the previous session. However, over the past month, the index has risen by more than 2%, and it is up over 18% from a year ago, reflecting demand for local equities due to undervaluation, despite South Africa’s underlying headwinds.
Commodities
Brent crude oil futures fell below $73/barrel but are still set for a third consecutive weekly gain. Fears of supply disruptions due to the ongoing conflict between Israel and Iran have supported prices, even as Iran continues to export crude at high levels. A sharp drop in US crude inventories earlier in the week has also helped keep oil prices elevated.
Gold prices dropped below $3,360/ounce, nearing a one-week low and heading for their first weekly decline in three weeks. Investors have been selling gold to cover losses in other markets, and the prospect of no or gradual interest rate cuts has limited gold’s appeal. Industrial metals like copper have shown mixed results, with long-term demand prospects remaining positive but short-term caution prevailing due to policy uncertainty and weaker global growth.
Currencies
The US Dollar Index slipped to around 98.6 but is still set for a weekly gain, as demand for safe haven assets remains strong due to the risk of wider conflict in the Middle East. The Fed’s steady policy stance and warnings about inflation from new tariffs have also influenced the dollar’s performance.
The British pound traded near $1.34/£ after the BoE’s rate decision, with the split in the decision among policymakers highlighting ongoing UK inflation risks. The euro has been steady, with market participants awaiting further signals from the ECB. The Japanese yen has weakened against the dollar as investors favour the greenback for safety, despite rising Japanese bond yields.
The South African rand is bouncing between R17.90/$ and R18.10/$, showing a slight weakening trend since its recent rally. The rand’s performance has been largely influenced by global risk sentiment and fluctuations in commodity prices. Compared to other emerging market currencies, the rand has held up well in recent sessions, despite ongoing uncertainty in global markets and the impact of international developments on investor appetite for risk assets.
*Please note that all market information and data is at the time of writing.
Key indicators:
USD/ZAR: 18.02
EUR/ZAR: 20.76
GBP/ZAR: 24.29
OIL: $76
GOLD: $3,351
Sources: Bloomberg, Refinitiv, LSEG Workspace, Trading View, Trading Economics, Reuters, Aljazeera, CNBC, Yahoo Finance, FOX Business, The Conversation, IG and DW.
Written by Citadel Advisory Partner and Citadel Global Director, Bianca Botes.