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Rising geopolitical tensions with Iran have led to some fears over potential oil supply shocks out of the Middle East. Indeed, Brent crude prices have risen 3.5% year-to-date as markets try and account for this risk .
However, it is unlikely that these tensions will lead to a significant climb in oil prices that spell danger for the global economy for a few reasons:
- First, while Iran produced crude oil at roughly 2.4mb/d in 2019, this accounted for just 8% of total OPEC supply and less than 3% of total world production. Moreover, it is reasonable to assume that any supply disruptions out of Iran will be offset by an increase in production from other OPEC+ countries.
- Second, typically, a 70-80% year-over-year increase in the price of oil is needed to negatively impact growth. Therefore, the roughly 20% rise in the price of Brent oil over the past year should not be enough to curtail global consumption.
- Lastly, data suggests that global growth is still finding some footing. Therefore, global oil demand is likely to remain tepid in the coming months, offsetting any supply shock premium.
- While futures markets try to price the impact of US-Iran tensions, spot prices should reflect actual supply disruptions. As shown, a tightening in global supply/demand balance by about 1mb/d (in other words, almost half of all Iranian production taken offline) would be needed to cause a spike in oil prices large enough for concern. For investors, the global coordination of oil production are likely to keep price swings short-lived and provide a ceiling for oil prices in the medium term, keeping the global economyfrom avoiding a recession.
Supply/demand balance should drive the change in oil prices
2011-2019
Source: Bloomberg, Energy Intelligence Group, FactSet, ICE, J.P. Morgan Global Economic Research. Data are as of January 8, 2020.