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Israel attack on Iran: market impact
In the early hours of 13 June, Israel launched air strikes on Iran targeting its nuclear programme and military facilities and killing several top commanders. Iran fired more than 100 drones at Israel in retaliation. US President Donald Trump warned Iran of “even more brutal” Israeli attacks unless it agrees a deal on its nuclear programme.
Oil prices surged in the aftermath of the attack, with Brent crude, the international benchmark, initially climbing by more than 12%. Global stock markets dipped, and the traditional safe-haven assets of gold and the US dollar rose.
We had anticipated the risk of an escalation in Middle East conflict given heightened levels of volatility. Efforts by the US and other international powers to reach a nuclear deal with Iran are deadlocked.
But unless there is a further ratcheting up of conflict, we do not see the attack as a game changer for equity markets.
So far, no Iranian oil facilities have been affected and even a further escalation involving attacks on Iran’s oilfields would be manageable, in our view. Iran exports only 1.6 million barrels a day. OPEC (mainly Saudi Arabia) has already increased production and Saudi Arabia alone has around 3 million barrels a day in further spare capacity.
But investors may need to stay watchful. Israel Prime Minister Benjamin Netanyahu has said that Israel’s operations will continue for “as many days as it takes”, although we think Iran’s drone strike retaliation may be calibrated towards a de-escalation.
A big risk for markets – and oil prices in particular – would be from a sustained blockade of the Strait of Hormuz, the narrow waterway separating Iran from the Gulf states. Around 20 million barrels a day – a third of the world’s seaborne oil – passes through the strait and Iran has previously threatened to close it in the event of an attack. Any such blockade would likely lead to a significant surge in oil prices and pose a negative impact on equity markets.
What may happen next?
We think the odds of a negotiated halt to the conflict appear low, given Israel’s comments that it was planning multiple days of strikes. Iran has threatened Israel with “severe punishment”. In our view, Israel likely has the appetite to induce regime change in Iran, beyond mere strikes on the nuclear programme. Meanwhile, any Iranian retaliation against Israeli civilians will make the conflict harder to stop.
But there may be reasons to think that tensions can be managed if Iran seeks a peaceful resolution. Iran’s leadership may conclude that it has no chance of “winning” a war with Israel and/or the US and has a better chance of staying in power through peace than continued war.
We think that, if the US only allowed Israel to strike Iran because of a real and immediate nuclear threat, then that permission would end once the threat was reduced. We also believe that although Mr Trump may welcome any prospect of a replacement of the current Iranian regime, he may not be inclined to pay the cost of seeing such a process through. A lengthy conflict against Iran could bring a sustained rise in oil prices and fresh volatility to markets.
