World Barrels Toward Major Oil Industry Disruption

Clear Facts:

• The Israel-Hamas conflict might pull in militant groups from Lebanon or Syria, or even trigger a direct clash with Iran.
• Matt Gertken of BCA Research predicts a 70% chance of the conflict spreading beyond Gaza within a year.
• Potential expansion of this war could lead to major disruptions in the oil supply.

Matt Gertken, a top geopolitical strategist for Montreal-based BCA Research, has voiced serious concerns over the expanding Israel-Hamas conflict.

In his view, there’s over a 50% likelihood of this war entangling militant factions from neighboring countries like Lebanon and Syria.

More alarmingly, he hasn’t ruled out a direct confrontation with Iran, a development that could wreak havoc on global oil markets more than what’s currently anticipated.

Even though financial markets seem tranquil at the moment, strategists are deeply pondering the possible repercussions of this escalating conflict.

The serenity of investors was evident as the three primary U.S. stock indexes DJIA SPX COMP exhibited a rising trend on Monday morning.

Concurrently, there was a noticeable dip in the value of oil, with Brent crude BRN00, 1.12% declining by 1.2%, settling below the $90-a-barrel mark. The U.S. benchmark CL00, 1.34% CL.1, 1.37% also experienced a momentary drop of 1%.

However, underlying these market behaviors is an undercurrent of unease. Certain traders and investors harbor apprehensions about an unforeseen resurgence of U.S. inflation.

This inflationary trend hasn’t been completely accounted for in the financial projections, and this comes at a juncture when no decisive action is expected from the Federal Reserve in its upcoming meeting scheduled from Oct. 31-Nov. 1.

Chris Low, the chief economist at FHN Financial in New York, stated, “a frozen, uncertain Fed risks higher inflation and higher market rates as a result.”

Back at BCA Research, Gertken’s analysis presents a mere 30% probability that Israel will restrict its retaliation to just Gaza.

He rather highlights a more substantial 45% probability that the war could encompass Hezbollah and other militant entities in Lebanon and Syria.

This potential expansion, in his words, could give rise to “a regional war with higher risk of impacting oil, but not necessarily a direct impact.”

Further dissecting the probable scenarios, Gertken assigns a 25% probability that Israel might take offensive action against Iran or its substantial assets spread across the Middle East or its “core sphere of influence” that includes Iraq.

Such aggressive actions might compel Iran to reciprocate militarily, possibly disrupting the oil supply as a message to the U.S. to rein in Israel.

The turbulent Middle East scenario carries a 31% chance of inducing severe oil shocks. BCA Research urges investors to brace for such disruptions as a standard expectation in the next one to two years.

Gertken’s advice to investors in this backdrop is to “go long defense stocks and energy versus cyclicals.”

Principal Asset Management’s chief global strategist, Seema Shah, echoed similar concerns about the escalating tensions.

She said, “The key macro concerns from the developments in Israel lie with the threat of upward pressure on oil prices.”

Shah continued, pointing out that even though “Brent crude prices have not risen materially,” any significant escalation might further amplify the pressures on oil prices.

She emphasized the potential knock-on effects this could have on inflation, ultimately demanding corrective action from central banks.

If these oil prices surge and exert additional inflationary pressures, there might be anticipations of extra interventions from policymakers, potentially signaling a renewed bond rout.

Shah advises, “In light of the situation in Israel, it is prudent for investors to maintain a diversified portfolio across different asset classes, with a particular emphasis on high quality and defensives.”

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