Why Oil’s Spike Isn’t a Dagger to Global Stocks

One year since Hamas brutally attacked Israel, and with Middle East conflict escalating, warnings over potential economic effects from a possible Israeli retaliatory strike on Iran are blaring amongst commentators we follow. According to some, Iranian oil facilities may be targeted—causing oil prices to surge and sparking widespread alarm in headlines we read that widening regional war will cause costlier energy globally, crippling economic growth. We think this is premature.

As Exhibit 1 shows, Brent crude oil prices jumped to around $80 (£61) per barrel in recent days, off its $70 (£53) low on 11 September. But some perspective is in order. That is still well below the $94.33 (£72.00) mark in the wake of last year’s attack, and isn’t very high in the context of oil prices over the last 10 to 20 years.^[i] If higher oil prices over the last year didn’t stop global growth and global stocks’ bull market (long period of generally rising stock prices), we doubt the latest blip higher will today.

Exhibit 1: Global Stocks and Oil Prices Since October 2023

Source: FactSet, as of 8/10/2024. MSCI World Index returns with net dividends and Brent crude oil price per barrel in US dollars, 7/10/2023 – 7/10/2024. Currency fluctuations between the dollar and pound may result in higher or lower investment returns. Please see our Annex below for an extended, five-year version of this chart.

Setting aside daily fluctuations, our research finds oil prices are driven by supply and demand. Whilst the latest surge appears driven by sentiment from greater uncertainty over Iranian oil supplied globally, Iran doesn’t produce that much in reality. It pumps about 3.2 million barrels per day (bpd)—around 3% of the world total—and, due to Western sanctions, over 90% of the 1.7 million bpd it exports goes to China.^[ii] The Western world has adapted around Iran for energy. And even for China, Iran accounts for just 15% of oil imports.^[iii] This is far smaller than when Russian oil—about 11 million bpd, 11% of global supply—became unavailable (in a direct sense) for Western purchase after sanctions.^[iv] We find prices spiked temporarily as supply chains rerouted, but the pain didn’t last.

Meanwhile, OPEC+ (the Organisation of Petroleum Exporting Countries and 10 other oil-producing countries) is sitting on 5.1 million bpd spare capacity (more than offsetting Iran’s production).^[v] This is one reason oil prices were sliding before the recent spike, in our view. Saudi Arabia alone has 3.2 million bpd spare capacity—that is, with the oil it intentionally isn’t pumping, the Kingdom can match Iran’s output barrel for barrel.^[vi] There was abundant chatter the Saudis were about to unleash excess supply to retake market share.^[vii] Last Wednesday’s OPEC+ meeting, though, indicated only a marginal 180,000 bpd quota increase in December, which by itself doesn’t mean much, as members haven’t adhered to it anyway.^[viii] But because of their non-compliance, Saudi Arabia reportedly threatened to boost production sizably—if overproducers don’t comply.^[ix]

Notably, too, Libyan production also resumed Thursday after competing governments within the country resolved a month-long dispute that had shuttered approximately 750,000 bpd of its typical 1.2 million bpd output.^[x] And all of this is just OPEC+, which (theoretically) controls only 26% of global supply.^[xi] The US (22% share of world output) and Canada (6%) combined have more sway.^[xii] As swing producers go, we think Iran hardly rates. On the other hand, it is also worth noting that American and Canadian output levels each peaked in December 2023 and have levelled off since.^[xiii]

Overall, given oil’s fungibility, what matters are global supply and demand trends, based on our research. With global supply averaging above 102 million bpd this year, and demand around 103 million bpd, they are roughly in balance.^[xiv] Under these conditions, according to our analysis, oil prices likely remain rangebound—as they have all year—no matter who buys from whom. Prices likely won’t run away when there is ready supply available to meet demand, in our view. And we think higher prices invite more supply—which is why spikes tend to be self-deflating in time.

Now, if Israel does attack Iran’s oil infrastructure, some commentators we follow say Tehran could blockade the Strait of Hormuz, a narrow passage where more than 20% of the world’s oil flows daily to reach global customers.^[xv] But our research shows this is a long-running issue markets have dealt with before without much incident. For example, Iran and Iraq fought a protracted war for most of the 1980s. With both sides seeking to sink each others’ tankers, they managed to stop only 2% of oil traffic through the Strait.[xvi] We find the bark was far more menacing than the metaphorical bite.

Or take more recent (and ongoing) Red Sea attacks, which continue to reroute cargoes around South Africa’s Cape of Good Hope, adding weeks to shipments that ordinarily traverse Egypt’s Suez Canal. Though the diversion isn’t ideal, in our view, it is hardly as catastrophic as several commentators we follow first warned. We have observed what was once headline grabbing now barely ripples.

Of course, major supply disruptions could shock markets—see supply chain problems from 2020’s pandemic lockdowns with any questions. But we think the difference in scale shows why global economic and market calamity remains unlikely. We doubt trouble in one tiny—and replaceable—corner of the oil market rates much next to worldwide shipping upheaval. We will continue to monitor the situation—and broader conflict—but the lack of global scope suggests to us current oil market fears are overrated.

Annex: Global Stocks and Oil Prices, October 2019 – October 2024

Source: FactSet, as of 8/10/2024. MSCI World Index returns with net dividends and Brent crude oil price per barrel in US dollars, 7/10/2019 – 7/10/2024. Currency fluctuations between the dollar and pound may result in higher or lower investment returns.