Oil markets have seen volatile days, but rarely as dramatic as what hit on Monday. Yesterday morning Brent crude touched $119 a barrel.
By yesterday evening it had dropped back to around $90 as comments by US president Donald Trump hinted at an early end to US military action. What happens next is anyone’s guess. Ending the conflict may yet be a difficult exercise.
Financial and energy markets have been nervous ever since the US/Israeli attacks on Iran. Yesterday, these nerves led to a touch of panic, as Brent oil prices soared to $119 per barrel in early trading – the highest since 2022 – and Far East stock markets took a heavy hit.
Talk of the return of “stagflation” – high inflation and low growth – is unnerving investors. Consumers, already seeing higher heating oil and petrol prices, look on. A lot remains to play out, but energy prices had reached the danger zone – levels that would , if sustained, cause damage. Governments, including our own, have been urgently war gaming how to limit the hit.
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By midmorning things calmed down a little bit. The key piece of news was that G7 finance ministers – under the aegis of the International Energy Agency – were to discuss the possible release of international oil reserves that are held in storage by most of the big countries, including the US.
Oil fell back to around $100 a barrel, up about 7.25 per cent on the day and about 25 per cent up on pre-conflict levels by the European close. Share markets moved off their lows.
In the event, the G7 ministers did not agree on a coordinated release of reserves but said they stood ready to act if needed.
And then in his CBS interview last night Trump said that the war was “very complete, pretty much” raising hopes of an early end to the conflict. Cue a dramatic drop in oil prices.
The big economic fear has been the risks from a wider and longer war and, more specifically, ongoing disruption to oil and gas shipments and the Gulf energy infrastructure. The European Commission warned of a substantial stagflationary impact if the conflict continued beyond a couple of weeks.
Higher energy costs feed through to household budgets and business costs. They also knock on directly to refined oil products such as kerosene used for home heating oil and fertiliser costs and, indirectly, to prices generally as business and transport operators pass on higher charges they are facing. Sea freight prices hit new records yesterday, up 20 per cent on last week.
Sea and air transport disruptions in the Gulf risk adding another twist to inflation, but this is not a repeat of the gummed-up supply chains that followed Covid-19.
But yesterday evening the news cycle turned - and so too did the markets. As well as falling energy prices, share prices headed higher, with the Dow Jones closing up 0.5 per cent. This suggests that investors are hopeful that Trump’s comments signal an earlier end to the war, but as yet are far from sure.
He has not, as yet, called a halt. And given that he has recently indicated that US action could continue for some weeks, investors will wait to see what interpretation is now put on his comments. Trump did appear to double down on them later on Monday when he told Republicans that they will see that the attack on Iran was a “short-term excursion.” But he also added that the US had not “won enough yet.” There is still, on this basis, some way to go.
There had been speculation that the unpopularity of the action among US voters and the rising economic risks would persuade Trump to end US involvement sooner rather than later. That said, few had expected the comments which came late on Monday.
There will be also be questions about what happens in the event of the US deciding to suspend its action. What will happen inside Iran, where the US had been pushing for regime change ? Will conflict between Iran and Israel continue? What is the outlook for the region now ?
And , crucially, might Iran sustain its campaign to disrupt shipping and attack oil infrastructure in its neighbours in the Gulf states? As Trump’s comments are interpreted, there is still a way to run in this story. The war is not yet over and ending the war is unlikely to be as straighforward as starting it was.
