While equity investors on Tuesday were bingeing on hopium over an end to the war, oil and jet fuel costs were pricing in a different outcome.
As the past 50 years of oil shocks have shown, the end of a conflict does not bring a quick resetting of prices back to pre-war price levels. Investors, as a result, have calibrated their expectations on oil and gas prices in any post-war Persian Gulf.
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If the war does not end soon, the energy shortages cascading through the Asian economy will arrive in Europe in the near term.
The differences between paper and physical oil markets are evident in today’s conflict. Should the war continue or intensify, another round of price increases for all energy products from the Gulf would be likely.
The global economy endured four energy shocks in the first two decades of the 21st century. Today’s energy shock is the second war-induced spike in oil prices in less than five years.
The earlier energy shocks were the result of both geopolitical events and supply-demand mismatches. (We note that the 2003 Iraq war did not in itself precipitate a major energy shock but was the prelude to a global increase in demand that peaked in 2008.)
In nominal terms, the current spike in oil prices, to $102 per barrel for West Texas Intermediate and $118 for the Brent global benchmark, is approaching the rise in all but the 2008 demand bubble leading into the recession of 2009.
But a lot has happened since then, including the expansion of the global supply chain, the surge in U.S. oil and gas production, the expansion of the line of petroleum-based products coming out of the Middle East, and the growing importance of Asia in the global economy.
When the supply of fertilizer is suddenly cut off or when the cost of conducting business in Singapore becomes prohibitive, there will be newly considered costs for households and businesses as the global supply chain is fractured.
We think we are nearing an inflection point.
In the sections that follow, we compare the recent price hikes with the 2022 invasion of Ukraine and the sanctioning of Russian energy supplies.
Crude oil
The 2022 invasion occurred as oil prices were already trending upward after the 2020 pandemic. In contrast, oil prices in the years before this year’s attack on Iran had been dropping from the 2022 peak, making it even more difficult for households to handle the sudden increase in the retail price of gasoline.
Still, global crude prices are 64% higher now than they were on February 27, the day before the attack on Iran and higher than 22 days after the Ukraine invasion. We expect this trend to continue if the Strait of Hormuz remains closed to shipping.
Natural gas
While the price of natural gas in the U.S. has increased by 8% since the attack on Iran, it is 59% higher in western Europe.
Supply shortages from the Iran war are more likely to affect Europe and Asia than the U.S., which is self-sufficient, but those prices are set within a global marketplace.
Jet fuel
While jet fuel prices in New York have increased by 74% since the start of the Iran war, the price in Singapore is 140% higher.
This is indicative of the increased cost of shipping high-value goods from Asia as well as the cost of face-to-face meetings and vacation travel.
By comparison, jet fuel prices after 22 days of the 2022 war increased by only 15%.
U.S. retail gas and diesel prices
In the U.S., the 42% increase in the retail gas price and the 54% higher cost of diesel are likely to have geopolitical consequences, depending on the duration of the war.
The takeaway
The nominal price of crude oil is nearing levels of previous energy shocks. And while the severity and the duration of the energy shock are yet to be determined, we think we are nearing an inflection point.
Comparisons to energy prices of the 2022 invasion of Ukraine suggest that the current war is having a far wider impact with far more consequences, particularly for Europe and Asia.
