Will we avoid an oil price spike?

published 20 June 2019

952_MW_P05_Markets — A fifth of the world's oil travels through the Strait of Hormuz

Last week's attacks on two tankers in the Persian Gulf are hardly a job for Hercule Poirot, says John Hulsman in City A.M. With Donald Trump's White House applying "maximum pressure" on Iran's economy, Tehran "had the motive, means, and opportunity to perpetrate the crime."

Whoever is responsible, the incident has raised new concerns about global oil supplies. About one-fifth of the world's oil travels through the narrow Strait of Hormuz, where the attacks occurred. The Economist points out that a 2008 study found that if Iran mined the choke point it would take the US "the better part of a month" to reopen the crucial waterway. The burning ships sent Brent crude up by 4%, yet at $61 per barrel the price remains well below the April highs around $75.

Demand trumps supply

Along with slowing demand, the other crucial factor keeping a lid on oil prices is the "abundant supply of US shale oil", write David Sheppard and Harry Dempsey in the Financial Times. US commercial crude-oil stockpiles climbed by another 2.2 million barrels in June.

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Swings in the world's most important commodity price have far-reaching economic implications. On one hand, higher energy costs for business are passed onto consumers through price increases, bolstering inflation. Yet on the other, because an oil-price spike operates like a tax increase on many economic activities it can end up choking off demand, which is deflationary. An analysis by Oxford Economics has found that Brent at $100 per barrel would shave 0.6% off global GDP by the end of 2020. The world economy is currently expected to grow by 3.3% this year.

"Every major recession we have seen has been preceded by a ramping up of global commodity prices," Chris Midgley of S&P Global Platts tells The Guardian. Surging crude prices "would raise a huge recessionary risk".

For the time being, it appears that weakening demand and US shale supplies will prevent a runaway bull market in oil. Yet with growth weakening across the world and the trade dispute worsening, talk of war in the Middle East is yet another headache for investors.

Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.