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Energy Markets and Geo-Political Risk

Escalation to Iran and Risk to Strait of Hormuz

Any threat to the world’s most important energy choke point, the Strait of Hormuz, will rattle the global energy markets. Thus the Israel-Hamas War could escalate into a wider conflict. With tight global oil supply due to the current deal in Opec+ between Saudi Arabia and Russia could spark a jump in the oil price over $100 a barrel. This means a rise of prices at the pump further increasing inflation and potentially leading to a stagflation enviroment for policy makers at central banks.

Now the question that needs to be asked, how likely is this possibility.

Following the news this week, our opinion is that it will not esccalate into a wider conflict. Our reasons are as follows.

Indications from Key Players to De-escalate Risk

On the 8th of October, a Wall Street Journal Report implied that Iran was involved in the directing the attack. Iran has denied this with Israel vowing to strike Iran if this was found to true. The US government stated they did not have enought evidence. The fact that Iran is not taking credit but acknowledged thay Hamas was planning something but they did not know how big or the timing is a statement that they are not looking to escalate this further.

The US government has evidence that Iran was suprised at the scale that was noted in a Wall Street Journal article on the 11th of October. In fact, Hamas was probably surprised at how events had unfolded with the slow Israeli reponse, this was mentioned over the weekend on Bloomberg as well by one of my former academic colleagues.

In addition, the US sent an aircraft carrier group to the Eastern Meditterean with potentially a second aircraft group on the way. This was a clear message to both Iran and Hezbollah not to think of opening a second front to the north of Isreal or blocking the Strait of Hormuz.

The conversation today between Saudi Arabia and Iran to keep the peace and de-escalate.

Finally, Hezbollah has a lot to loose at this moment since it is aleady busy fighting in Syria. If were to get involved in a war with Israel it would face heavy casualties and weaken its position within Lebanon. Firing a few rockets to show solidarity with Hamas is taken as a signal by Israel not as a war but that Hezbollah does not want to go further.

In addition, Lebanon is in the currently in a mess and a Hezbollah war with Isreal on a second front will really hurt the population further and thus will be very unpopular. This has to be part of the calculation that Hezbollah makes.

Current diplomatic efforts led by the US to get key countries such as Qatar, Turkey, Egypt and Saudi Arabia involved in keeping the peace. For example, Qatar and Turkey could preassure Hamas on releasing some of hostages, etc.

Implications for the Global Oil and Gas and Markets

Expect some volatility as diplomatic efforts are under way. In addition, the placing of one and potentially two US aircraft carriers in the area is a strong stick for countries to solve this situation. Thus, we see the volatility of oil and gas prices as relatively muted.

Our view is that global markets are headed into recession and that the ‘fairy-tale’ scenario of a soft-landing in the US will not materialize. Currently, we are still negative on oil stocks.