Monday market report: Panic spreads as oil prices rocket
Susannah Streeter, chief investment strategist, Wealth Club: “Panic has hit equity markets after oil prices rocketed as fears materialised about a big squeeze in global supplies. London’s FTSE 100 has opened sharply lower, after steep falls in Asia, with the Nikkei plummeting 5% and South Korea’s Kospi almost 6% lower, adding to deep losses last week.
Crude prices shot up by more than a quarter as trading got underway on oil markets. It’s been the biggest jump since the outbreak of the pandemic, and investors are bracing for an inflation crisis. The oil market is clearly under distress as the key Strait of Hormuz, through which a quarter of crude supplies are usually transported, is impassable, facilities have come under attack, and big producers have cut production.
Prices have retreated a little from the scorchingly high levels reached earlier, as G7 finance ministers, including those from the US, arranged a call amid the crisis and are expected to release oil from emergency reserves.
The worsening situation in the Middle East has the potential to bring a toxic combination of shocks to economies. Inflation is set to rise sharply, given the spike in energy prices, which may lead central banks to keep interest rates higher for longer. Higher energy prices and borrowing costs will be a drag on growth, and the concern is that governments lack the financial firepower, given high debt levels, to deliver meaningful support to companies and consumers. The spectre of stagflation is hovering, with high inflation and stagnant growth looking increasingly likely unless there’s a rapid de-escalation in the Middle East.
In the Gulf, producers are slashing output as they continue to face a barrage of strikes from Iran. Kuwait and the UAE are reducing production as storage fills rapidly and they are unable to ship out crude. Iraq had already been cutting output from its main oil fields, and Qatar has been forced to reduce liquefied natural gas production after an attack on its facilities.
Saudi Arabia has been intercepting drones targeting its Shaybah oilfield, and there are concerns that it could also be forced into making production cuts. Right now, it’s diverting crude through the Red Sea and via its Yanbu pipeline to try to maintain supplies. But given the erratic nature of the situation and fears about continuity ahead, Saudi Aramco is reportedly offering immediate supply through rare tenders on the spot market. Fear is ramping up because a war of attrition now seems to be taking hold, with worries that the conflict is becoming more entrenched day by day. The appointment of Mojtaba Khamenei as Iran’s new Supreme Leader appears to have inflamed the situation, with the CIA calling it unfortunate.
The US claims its attacks on infrastructure across Iran will eventually remove the danger for ships in the Strait of Hormuz by destroying military capabilities, but the risk is that the war will escalate further, with more intense attacks on Saudi Arabia now expected.
The dramatic moves we’ve seen on markets will be worrying, but investors still need to keep a cool head and resist the temptation to switch and ditch stocks. During periods of volatility, it’s also important to remember that time in the market and diversification have consistently been the foundations of successful investing. For investors owning quality companies over the long term, big upsets are part of the journey. History has shown that after previous conflicts around the world, markets have recovered — but it can take considerable time and patience.”