Advertisement

Will we avoid an oil price spike?

With around a fifth of the world’s oil travelling through Strait of Hormuz, the most recent incident there has raised new concerns about global oil supplies.

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.

Advertisement - Article continues below

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.

Advertisement
Advertisement

Recommended

Commodities look cheap
Commodities

Commodities look cheap

Gold may be on a bull run, but industrial commodities, including copper, zinc and aluminium, remain cheap.
17 Jan 2020
What escalating tension between Iran and the US means for oil prices
Global Economy

What escalating tension between Iran and the US means for oil prices

The tension between the US and Iran is unlikely to mean all-out war in the Middle East. But markets may be getting a little too complacent about its e…
6 Jan 2020
Rising output will keep a lid on the oil price
Oil

Rising output will keep a lid on the oil price

Oil exporters’ cartel Opec gave further encouragement to the bulls this month after agreeing to new production curbs.
20 Dec 2019
Brace yourself for pricier oil
Oil

Brace yourself for pricier oil

Global growth, and hence demand for oil, could surprise on the upside next year, leading to a bounce in the oil price.
29 Nov 2019

Most Popular

Eagle Lightweight GT: the reincarnation of the E-type Jag
Toys and gadgets

Eagle Lightweight GT: the reincarnation of the E-type Jag

Jaguar’s classic E-type sports car has been reinvented for the modern age. The result – the Eagle Lightweight GT – is a thing of beauty.
7 Aug 2020
Platinum: the precious metal that looks set to play catch-up with silver and gold
Silver and other precious metals

Platinum: the precious metal that looks set to play catch-up with silver and gold

Gold and silver continue to soar, but there's still time to get in. And there's another precious metal that looks set to go on a bull run too, says Jo…
7 Aug 2020
UK house prices hit a new record high – can it last?
House prices

UK house prices hit a new record high – can it last?

Despite the pandemic, UK house prices have hit a new high. John Stepek looks at what’s driving the surge in prices, and what it means for house prices…
7 Aug 2020