Global economy faces greatest global energy security threat in history, says Chris Flood, chief correspondent, ETF Stream.
Volatility in oil and gas prices has surged during the third week of the war in Iran, dragging down stocks, bonds and even the price of gold amid growing fears that the global economy is heading for a damaging stagflationary shock of weaker economic growth and higher inflation.
Many investors have adopted a “wait and see” stance since the US and Israel launched their attack on Iran in the hope that the war will prove brief. Those hopes were shaken after Israel struck Iran’s South Pars gasfield and neighbouring refineries and Tehran retaliated with missile attacks against Qatar’s Ras Laffan terminal which caused extensive damage to the world’s largest liquefied natural gas facility.
Brent crude, the global oil benchmark, reached almost $119 a barrel on March 19 following the attacks before easing back to trade around the $110 level on the final trading day of the week.
Fatih Birol, the head of the International Energy Agency, warned on Friday that the Iran war represented the “greatest global energy security threat in history,” adding that politicians and investors were underestimating how quickly supplies of oil and gas from the Gulf could be restored.
Goldman Sachs predicted that Brent was likely to exceed its all-time price high ($147.50 in July 2008) if oil supplies were to remain low as a result of the blockade by Iran on the Strait of Hormuz.
Crude oil prices could stay above the $100 a barrel level “for longer” given the “meaningful downside risk” to long-term supply, especially from Iran and from offshore production [in the Persian Gulf], said the Wall Street bank.
“The risks to oil prices remain skewed to the upside, both in the near-term and in 2027,” said Daan Struyven, co-head of global commodities research at Goldman.
The current surge in crude oil prices has only been exceeded during three earlier geopolitical shocks: the 1973 Arab-Israeli Yom Kippur war; the 1979 Muslim Brotherhood uprising in Syria; and the 1990 Gulf war when Iraq invaded Kuwait.
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The wars in 1973 and 1990 led to drawdowns of 17.1% and 14% respectively for the US stock market. The S&P 500, which has dropped just 4% since the start of the current Iran war, is currently very tightly correlated with US crude prices, suggesting the US equity market will remain vulnerable to further weakness given the risk of even bigger disruptions to global oil production if the fighting in the Gulf continues.
More broadly, the Iran war is creating a shock across global supply chains with disruptions to a swath of vital commodities and products that originate in the Gulf, including liquid natural gas, airline fuel, shipping fuel, key inputs for fertiliser production, synthetic fabrics, helium for semiconductors, auto and truck parts and packaging for consumer goods.
Higher inflation globally appears inevitable and worries are growing rapidly about the risk of spikes in food prices, particularly in Africa and Asia.
The impact on investor sentiment is again clearly illustrated by ETF flows with withdrawals mounting across emerging market and Asia ETFs and outflows from ETFs also appearing in interest rate sensitive sectors in developed markets.
Data from Morningstar Direct for UCITS ETFs domiciled in Europe shows that by March 18, withdrawals from emerging market fixed income ETFs had reached $1.4bn while Greater China equity ETFs had registered outflows of almost $800m.
Investors have also pulled $178m from India equity ETFs and $52m from Mexico equity ETFs since the Iran war began.
Outflows from Asia ex-Japan and Asia equity ETFs have reached $198m and almost $109m respectively. Korea and Thailand equity ETF flows have turned negative with withdrawals of $80m and $20m respectively so far this month.
In developed markets, withdrawals from financial sector ETFs have jumped to $3.2bn while US equity large cap growth ETFs, an interest rate sensitive sector, have registered outflows of $909m.
Fears that the Iran war will result in higher inflation have led to repricing in government bond markets worldwide. This is also being clearly reflected in fixed income ETFs. Withdrawals from Europe fixed income ETFs have reached $675m while global fixed income ETFs have registered net outflows of $428m. Sterling fixed income ETFs have seen outflows of $415m so far this month started with increases in UK interest rates now priced in before the end of the year by the Bank of England.
The timing of the Iran war really could not have been any worse for the UK’s ISA season, a key time for fundraising for all asset managers.
