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

One year since Hamas brutally attacked Israel, and with Middle East conflict escalating, fear is turning to potential effects from a possible Israeli retaliatory strike on Iran. According to some, Iranian oil facilities may be targeted—sending oil prices surging late last week, sparking widespread alarm widening war in the region will cause costlier energy globally, crippling growth. We think this is premature.

As Exhibit 1 shows, Brent crude oil prices jumped to around $80 per barrel in recent days, off its $70 low on September 11. But some perspective is in order. That is still well below the $94.33 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. If higher oil prices over the last year didn’t stop global growth and the bull market, we doubt the latest blip higher will today.

Exhibit 1: Global Stocks and Oil Prices Since October 2023

Source: FactSet, as of 10/7/2024. MSCI World Index returns with net dividends and Brent crude oil price per barrel, 10/6/2023 – 10/4/2024.

Oil prices are driven by supply and demand. While the latest surge appears driven by sentiment from greater uncertainty over Iranian oil supplied globally, Iran doesn’t produce that much in reality. For perspective, Iran 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.^[i] The Western world has adapted around Iran for energy. And even for China, Iran accounts for just 15% of oil imports. 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. Prices spiked temporarily as supply chains rerouted, but the pain didn’t last.

Meanwhile, OPEC+ is sitting on 5.1 million bpd spare capacity (more than offsetting Iran’s production). This is one reason oil prices were sliding before the recent spike. 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.^[ii] There was abundant chatter the Saudis were about to unleash excess supply to retake market share. 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. But because of their non-compliance, Saudi Arabia reportedly threatened to boost production sizably—if overproducers don’t comply.

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.^[iii] And that is just OPEC+, which “controls” only 26% of global supply.^[iv] The US (22% share of world output) and Canada (6%) combined have more sway. As swing producers go, 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 leveled off since.

Overall, given oil’s fungibility, what matters are global supply and demand trends. With global supply averaging above 102 million bpd this year, and demand around 103 million bpd, they are roughly in balance.^[v] Under these conditions, 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. And 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 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. But this is a long-running fear 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.^[vi] The bark was far more menacing than the actual 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, it is hardly as catastrophic as first thought. 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. Trouble in one tiny—and replaceable—corner of the oil market doesn’t rate 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.