Given the brutality of the attack on Israel, it feels inappropriate to comment on narrow investment issues. But 20 months on from Russia’s invasion of Ukraine, recent events provide another window on geopolitical risk and have accelerated the investment shift towards safe-haven assets.
By the time Investors’ Chronicle hits the shelves on 13 October, we will have had a further steer on the health of the UK economy through official figures covering gross domestic product as well as the latest figures on services, manufacturing and industrial production. It’s doubtful whether investor sentiment has improved markedly despite recent upward revisions to post-pandemic economic growth, as it is far from clear whether the impact of 14 successive increases in the base rate is fully apparent. At any rate, the jump in short-dated UK bond yields points to mounting fears over economic contraction. Inflation has been trending downwards, albeit at a shallower pitch than the US rate. However, Iran’s possible involvement in the attack on Israel has raised the spectre of renewed inflationary pressures if — as seems conceivable — economic sanctions against Tehran are tightened.
The inverse correlation between crude oil prices and the US dollar occasionally breaks down when the global security situation deteriorates. Yet from an investment angle, it’s worth noting that the FTSE 100 outperformed many rival indices because of the weighting to energy stocks. That’s the flipside of the criticism that’s often levelled at the index because of its low-growth characteristics, at least compared with its tech-heavy counterparts. It’s understandable why policymakers would want to see more of the UK’s private fintech complex go public, but the influence of ‘old world’ stocks shouldn’t be ignored. There is a direct relationship between crude prices and the profitability of the oil majors, so share prices will act accordingly if the situation in the Middle East escalates.
According to CEIC Data, Iran’s crude output hit 3mn barrels per day (bopd) in August 2023, a 16 per cent uplift since the start of the year, but 17 per cent adrift of the monthly average rate since January 2002.
Things are set to improve on the ground. Iran leads the Middle East in terms of estimated refinery capacity additions by 2026, and it is actively blending its crude oil to the API gravity (petroleum weight) measure preferred by refiners in China and elsewhere in Asia. And Iran also recently unveiled at least four new oil and gas discoveries, with the finds expected to hold reserves of 2.6bn barrels of oil equivalent. Not only that, but Iran remains one of the few producers that can increase its exports while still being within its Opec quota.
Washington has ignored surging Iranian oil exports in 2023, effectively bypassing residual Trump-era sanctions. And it could be argued that the potential price impact of the global crude supply/demand balance has been magnified by the Biden administration’s draining of the US Strategic Petroleum Reserve to a 40-year low.
However, if the US was to revert to the unilateral stance on sanctions, it is by no means clear what the immediate impact on crude prices would be, save for the direction of travel. That’s because there are virtually no precise estimates as to Iran’s export volumes, as demonstrated by the consensus spread of 0.81mn to 1.2mn bopd at the end of 2022. It is generally held that the nation’s exports have picked up appreciably in the year to date, but even if it breached the top end of estimates, its exports would amount to around 6-7 per cent of the combined barrelage attributable to the leading five exporters globally – significant but not earth-shattering.
Some commentators have drawn comparisons between the latest attack on Israel and the Yom Kippur War, the Fourth Arab-Israeli War, which started nearly 50 years earlier almost to the day. Yom Kippur and the consequent Opec embargo on oil shipments to the US and its European allies caused the first oil crisis of the 1970s and the inflationary surge that followed in its wake. A repeat of this scenario seems unlikely given the competing interests of Saudi Arabia and Iran in the region, combined with the fact that US daily production is expected to rise by 850,000 barrels to a record 12.76mn bopd in 2023, raising hopes that the US will recapture the mantle of ‘swing producer’.
