Energy Prices Rise as USA/Iran 60-Day Ceasefire Agreement Collapses
Last Friday (July 10th), President Donald Trump announced that the 60-day ceasefire negotiated with Iran was over, having previously called their leadership ‘scum’ and ‘cuckoo’ as a result of an escalation in hostilities over the past week. The escalation which began last week, was originally blamed on Iran for targeting commercial traffic in the Strait of Hormuz, and indeed, hostilities continued to escalate over the weekend and up until recently, with the Iranian leadership announcing that the Strait of Hormuz was now closed.
Despite protests from President Trump persisting the Strait was still open, recently released ship tracking data has shown that no commercial shipping has crossed the Strait of Hormuz since a few days ago. Iran and the United States continue to exchange blows with Iran hitting targets in Jordan, Kuwait, Oman and Qatar in response to strikes by the US military forces. Last Tuesday (July 7th), the USA revoked the licence authorising the sale of Iranian crude, and the Iranian foreign ministry announced that the USA had “rendered futile all efforts of the past few months to reduce tension and establish peace in the West Asian region”.
In response to the breakdown of the peace accord, crude oil prices have shot up recently. Brent crude, the global benchmark, rose over 4.00% to $78.82 per barrel for September delivery—its highest level since June 22nd. While oil prices had nearly returned to pre-conflict levels when the peace accord was signed on June 17th, this surge leaves them 9.00% below where they stood before the conflict began.
Experts suggest that the previous spike, where crude oil hit a high of $126.31, is unlikely to be seen again. While the current risk premium should keep prices supported, an increase in output from Abu Dhabi and the OPEC+ output quota expansion will continue to add barrels to an outlook leaning towards oversupply. Indeed, the Emirate boosted crude oil production to an all-time high last month, pumping an average of four million barrels per day. However, analysts believe the long-term outlook for oil prices will depend on whether or not peace can be found in the Persian Gulf, but currently, it seems Iran and the US will continue to escalate the conflict.
Elsewhere, gold and silver declined, as the latest outbreak of hostilities raised inflation fears and the possibility of rate hikes by the federal reserve to combat an already stubborn inflation figure. Indeed, gold has dropped circa 1.13% with the price now down by circa 2.00% from a recent high of about $2,400. Experts advise that part of the problem for gold is the fall-out from the Middle East conflict, which has produced an inflationary environment where interest rates remain stubbornly elevated, as do bond yields thus making the opportunity cost of holding gold somewhat high.
In the longer-term, experts advise that if the conflict in the Persian Gulf continues and the Strait of Hormuz remains shut, and Iran continues to strike at key crude oil and LNG export infrastructure, prices could once again spike beyond the $100 p/bl mark. However, the current conflict has pushed many countries to accelerate their transition towards renewable energies. Additionally, a further effort by major energy firms to build more pipeline capacity should cover much of the Persian Gulf exports by 2028.
