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War, oil, safe haven assets and risk premium in the GCC

Geopolitical risk premium could well rise to $130 a barrel if Iran responds further to an Israeli attack

Matein Khalid
By Matein Khalid
U.S. President Biden receives interagency briefing on Hurricane Helene response and recovery efforts in the Roosevelt Room in the White House in Washington, U.S., October 1, 2024. REUTERS/Annabelle Gordon If traders bid up Brent above $80 per barrel in the next two weeks it is likely President Biden's administration could again sell oil from the strategic petroleum reserves oil price and war geopolitics Annabelle Gordon/Reuters
If traders bid up Brent above $80 per barrel in the next two weeks it is likely President Biden's administration could again sell oil from the strategic petroleum reserves

It is never prudent to underestimate the impact of war in the Middle East on oil prices. Especially if the protagonists are the most right-wing Likud coalition in the history of Israel and an Iran traumatised by the IDF’s wholesale demolition of its ultimate militia deterrent, Hezbollah.

Iran’s 180-missile attack on Israel did not cause mass casualties but will now set a rationale for IDF retaliation against Iran’s oil or even strategic nuclear assets. This is the reason the financial markets have bid up the price of Brent crude above $75 a barrel as I write. 

The geopolitical risk premium could well push the price up to $130 per barrel if Iran responds to an Israeli attack on its Kharg Island export terminal.

It could for example mine the Straits of Hormuz, the strategic chokepoint that straddles the tanker shipping lanes from the GCC’s oil terminals to the refinery networks of Southeast Asia, Japan, coastal China, Taiwan, South Korea and Europe.

Why is $130 per barrel the worst case scenario for crude? Brent surged to almost $130 per barrel in the months after Vladimir Putin invaded Ukraine in February 2022, an event that disrupted the Black Sea grain trade and led to food shortages and inflation spikes in Arab countries as diverse as Egypt, Algeria, Lebanon and Jordan. 

Could this tragic nexus of geopolitics – an oil price panic, higher food prices, inflation, and an explosive political situation – once again define economic reality for the oil-importing states of the Arab world? Sadly, yes.

However I doubt if the above scenario will be allowed to crystallise by the Biden White House five weeks before one of the most crucial elections in modern American history.

Biden responded to the Ukraine-induced oil panic by selling millions of barrels of crude from the strategic petroleum reserves. If oil traders bid up Brent above $80 per barrel in the next two weeks, expect such a strategy to become policy in order to contain a gasoline shock that will disproportionately hit lower income US consumers.

Over on Wall Street the smart money is also scrambling into classic safe haven assets. The Volatility Index or Vix, Wall Street’s pendulum of greed and fear, has risen 25 percent in a single session, a bearish omen.

The yield on the US Treasury 10-year note has fallen to 3.72 percent and petrocurrencies like the Norwegian kroner have risen against the euro where an ECB rate cut is now almost certain as inflation falls to 1.8 percent.

Gold rose by more than 1 percent on Tuesday, accentuating an already strong bull market performance so far this year.

Dock workers have gone on strike at the precise moment Iran and Israel brace for an all-out war

The capital markets now expect the FOMC to cut rates again by 50 basis points when it meets in November. The soft landing optimism that had lubricated the risk asset rally across the world is fading fast as the US faces the very real prospect of stagflation.

Dock workers across the East/Gulf coasts, some making $150,000 a year, have gone on strike for higher pay at the precise moment when Iran and Israel brace for an all-out war.

This is a geopolitical scenario that terrifies oil traders active in energy futures, options, swaps and synthetic derivatives markets, who trade 15 to 20 times the volume of Brent crude transported by oil tankers in the wet barrel market, estimated at 102 million barrels a day in late summer 2024.

In equities, defence contractors (led by missile firm Raytheon) and energy stocks are being bid up on Wall Street while big tech shares are being offloaded as are the shares of Asian oil importing states. 

Saudi and UAE equities have also fallen despite higher oil prices, a testament to the higher permanent geopolitical risk premium on GCC assets as they are vulnerable to a protracted war near oil fields, export terminals and maritime chokepoints.

Watch this space.

Matein Khalid is the chief investment officer in the private office of Abdulla Saeed Al Naboodah and the CEO designate of a venture capital firm. He is also an adjunct professor of real estate investing and banking at the American University of Sharjah

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