Iran-Israel Conflict Spikes Oil 10%, Disrupts Global Trade

The escalating situation in the Middle East, marked by Israel's military action against Iran, has sent ripples through the global oil markets, with Brent crude spiking more than 10% following the event on June 13.

The operation, described by Israeli officials as a "pre-emptive strike" related to Iran’s nuclear ambitions, heightens oil supply chain uncertainties in this strategically crucial region.

Following the attack, Brent crude surged to US$73.12 a barrel, its highest since January, while prices on the Nymex exchange in the US reached US$73.20. This sharp price increase raises concerns about potential disruptions to global energy supplies should hostilities expand.

Understanding Brent Crude's role

Brent Crude acts as a crucial global oil price benchmark, determining the cost for roughly two-thirds of the world’s crude oil trades.

This light, sweet crude, ideal for refining, originally referred to oil from the North Sea’s Brent field. Currently, it represents a mix of six oil types, including Brent, Forties, Oseberg, Ekofisk, Troll (BFOET) and Midland oil from Texas.

Despite being anchored in Northwest Europe, the Brent benchmark guides the pricing for oil exports from Europe, Africa and the Middle East, emphasising its global significance.

Markets react to escalation

Energy traders quickly responded to the potential repercussions of the Middle Eastern conflict.

"It's an explosive situation, albeit one that could be defused quickly as we saw in April and October last year, when Israel and Iran struck each other directly," Vandana Hari of Vanda Insights told the BBC. She added: "It could also spiral out into a bigger war that disrupts Mideast oil supply."

Major stock exchanges across the globe experienced downturns, with London's FTSE 100 dipping 0.6% after reaching a record high, while Japan’s Nikkei, South Korea’s Kospi and Hong Kong’s Hang Seng also reported declines. Simultaneously, European markets saw reductions over 1%, anticipating further drops in the U.S.

Allen Good, Director of Equity Research at Morningstar, anticipates: "We expect, absent a wider war, today's rise in prices will likely prove to be a sell-the-news event.

"Oil markets remain amply supplied with OPEC set on increasing production and demand soft. US production growth has been slowing, but could rebound in the face of sustained higher prices.

"Meanwhile, a larger war is unlikely," Allen predicts. "The Trump administration has already stated it remains committed to talks with Iran.

"We expect a response from Iran, but it will likely be modest, like past retaliatory strikes and not spark a wider war. Ultimately, fundamentals will dictate price and they do not suggest much higher prices are necessary. Although the global risk premium could rise, keeping prices moderately higher than where they've been much of the year."

Furthermore, repercussions extend beyond oil markets.

Increased geopolitical tensions have pushed gold prices up by 1.5% to US$34,434 an ounce, approaching April’s record. The Swiss franc and Japanese yen also gained 0.4% against the dollar, with the US dollar index advancing by 0.5%.

Strait of Hormuz in the spotlight

The Strait of Hormuz emerges as a focal point amid ongoing tensions—this narrow maritime passage connects the Gulf with the Arabian Sea.

Holding about one-fifth of global oil and significant quantities of liquefied natural gas, the strait is flanked by Iran to the north and Oman and the UAE to the south. Should Iran target infrastructure or shipping routes in retaliation, global supply lines may face severe disruptions.

"There's not just the outlook for Iranian exports that's a concern but also the potential for disruption to shipping in the Persian Gulf's Strait of Hormuz," says Derren Nathan of Hargreaves Lansdown.

"It’s a key route for about 20% of global oil flows and an even higher proportion of liquified natural gas haulage."

With numerous tankers traversing this critical route, any obstruction could constrain the movement of millions of barrels daily, unsettling an already fragile global supply chain.

Ripple effects on investment and aviation

The geopolitical unrest also affects the aviation sector as airlines avoid the conflicted airspace, leading to over 4% drops in shares for IAG, British Airways’ parent company and easyJet. Concurrently, defence stocks saw an increase, with BAE Systems rising nearly 3% under the prospect of an extended conflict.

Oil giants BP and Shell reported roughly 2% gains, reflecting the relationship between oil prices and market conditions, although sentiment remains lukewarm towards fossil fuels, according to Morningstar's Michael Field.

For ESG-focused funds, these developments pose challenges, as noted by Kenneth Lamont, Principal for Morningstar's Manager Research Department, who observes a growing gap between ESG-aligned portfolios and traditional sectors involving defence and fossil energy.

"A serious military escalation in the Middle East could deal another blow to ESG funds, which have already been battling against poor performance rising anti-ESG sentiment—particularly in the US," he explains.

"Traditional sectors often excluded from ESG portfolios, such as defence and fossil fuels, are likely to benefit, widening the performance gap. The recent EMSA ESG naming guidelines, which emphasise climate objectives for sustainable funds and have further curtailed fossil fuel exposure, further cementing this divide."

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