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"The spectre of rising oil prices threatens to reignite inflationary pressures for Western economies"

ended 08. October 2024

With the oil price rising due to the escalating conflict in the Middle East, Newspage asked experts whether we could see $100 oil in the weeks ahead — and how it could impact Western economies, monetary policy and markets more generally. Their views are below.

6 responses from the Newspage community

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Editor
Gabriel McKeown
Head of Macroeconomics at Sad Rabbit - Substack Newsletter
The spectre of rising oil prices threatens to reignite inflationary pressures for Western economies, just as central banks were beginning to declare victory in their battle against surging prices. An economic tsunami looms as the Middle East crisis threatens to unleash oil market havoc that could send ripples through the global economy. The escalating conflict has set the stage for a volatile cocktail of surging prices and market uncertainty, as we could be on the brink of $100 oil. The recent flare-up in tensions has already sent prices soaring, and the VIX index, Wall Street's 'fear gauge', has spiked, reinforcing the uncertainty. This reaction is not unfounded, as the potential for further escalation brings the Strait of Hormuz into focus, as any disruption to this crucial artery could severely affect the global oil supply. This could trigger a recession in European oil-importing countries, particularly those grappling with high inflation and sluggish growth.
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Prem Raja
Head of Trading Floor at Currencies 4 You
There are several risks in the market currently with escalating tensions in the Middle East causing oil prices to rise sharply over the past week. These risks alongside Hurricane Helene are causing a lot of macro economic issues and are clearly hitting the market, which usually always causes a bid for the US Dollar. While oil prices remain volatile, it is as yet unclear as to how high they will rise. If tensions ease off then we will quickly see prices go back down, and with the Fed set to cut rates by only 25 bps in November there is good reason for the Dollar to remain strong going into the elections.
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David Belle
Founder and Trader at Fink Money
There are a few factors at play here. There was extreme short positioning in oil and the geopolitical mess in the Middle East has caused an unwind of these shorts, leading to a squeeze. There is also now an actual geopolitical risk premium added, in the absence of the short squeeze. In other words, oil would have drifted higher even without the extreme short positioning. The question to ask then is, 'is this going to have a longer lasting effect on monetary policy going forward? Right now, the chance for a 25bps cut from the Fed at its next meeting is at 87.4%, with yesterday's probability being 97.4%, which shows the market is indeed sensitive to this fluctuation. How sticky will this be? Like any squeeze on price, it can run out of fuel just as quickly as it started, especially if attitudes soften a touch on Iranian energy strikes by Israel. But that's not guaranteed in what is a rapidly escalating crisis.
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Editor
Wes Wilkes
CEO at IronMarket Wealth
Strikes, Middle East tensions and Hurricane Helene have once again put the global economy under pressure. But despite these headwinds, weaker global demand for goods has opened up some breathing room, allowing the global economy to weather the storm — for now. However, these disruptions serve as a stark reminder that negative supply shocks are becoming more frequent. While China’s disinflationary effect is unlikely to offset future shocks, the bottom line is this: the global economy can handle today’s disruptions, but the frequency of these events means we may not be this lucky forever. So, whilst we don't expect inflation to come raging back materially, the underlying forces mean that the volatility in the headline numbers may be here to stay.
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Riz Malik
Independent Financial Adviser at R3 Wealth
Oil price increases are inflationary and it’s not just rising oil we need to be concerned about. Further tensions in the Middle East could impact shipping and container costs increasing the landed prices of goods. Central banks will be monitoring the situation closely.
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John Choong
Head of Equities and Markets at Interpretiv
While $100 oil is possible, it's crucial to separate noise from signal. Rumours of Iran closing the Strait of Hormuz are likely overblown. Such a move would be economically self-destructive for Iran, given its reliance on oil exports and imports of refined products. With production at a 40-year low and ageing oil fields, Iran can ill afford to disrupt its lifeline to key partners like China. However, even without a Hormuz closure, sustained tensions could drive oil prices higher. The real wildcard is how central banks, particularly the Fed, will respond. If US inflation data surprises to the upside this week, coupled with higher oil prices, it could cement the Fed's initial "higher for longer" interest rate stance.