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CONTRIBUTORS

Stephen Dover, CFA

Chief Market Strategist,
Head of Franklin Templeton Institute

Kim Catechis

Investment Strategist, 
Franklin Templeton Institute

Larry Hatheway

Global Investment Strategist
Franklin Templeton Institute

Originally published in Stephen Dover’s LinkedIn Newsletter, Global Market Perspectives. Follow Stephen Dover on LinkedIn where he posts his thoughts and comments as well as his Global Market Perspectives newsletter.

Yesterday’s Israeli military attack on Iran highlights the gap between hopeful diplomacy and reality.  Militarily, the result will likely hamper Tehran’s nuclear and missile capabilities. 

In capital markets, we see the following impacts. 

Potential disruption of global oil supply: Due to Iran’s position as a moderate-sized oil producer and exporter, oil prices jumped on the news of Israeli’s military actions. Crude oil prices jumped US$4–US$5 per barrel, an increase of some 4%–6%. The concern is that an escalation of the military conflict could disrupt more significant supplies of crude oil and natural gas from larger producers in the Persian Gulf region. That said, there are no official confirmations that Iran’s oil production or export facilities have been targeted in Israel’s military strikes.

Move toward potential safe havens. Conflicts in the Middle East raise risk premiums, which is a further reason why global equity markets have dipped. But as long as the conflict does not escalate significantly further, we believe risk premiums and oil prices should return to lower levels. And even if Iran’s crude oil production or exports are disrupted, their relatively small share in global production will likely minimize the impact on global energy prices. Iran produces around 3.8 million barrels per day (bpd), around 4% of global production, and exports 1.8 million bpd, consuming the remainder domestically.1

The impacts of modestly higher oil prices are likely to be small for global growth, inflation and earnings. The world economy remains supported by monetary and fiscal easing (above all in Germany and China, but also in the United States), from the presence of low levels of US unemployment and solid US household balance sheets, and from receding underlying rates of inflation (potential tariff effects notwithstanding). In our opinion, a modest-sized “oil shock” will likely not risk the global expansion, nor change the inflation calculus significantly.

The risk case: Blocking the Straits of Hormuz would cut off Iranian oil exports to China. China is Iran’s biggest oil customer. Moreover, any efforts to hinder the flow of oil through the Straits would impact suppliers such as Saudi Arabia and the other Gulf states, as well as oil importers, particularly in Asia. 

But many parts of the world are less susceptible to “oil shocks.” The United States is a net exporter of oil and gas (liquefied natural gas), and Europe is electrifying at pace, with half its electricity coming from wind and solar power. Additionally, Beijing has been pushing electrification urgently for national energy security reasons.  

Conclusions. In summary, we believe a resilient world economy can withstand a moderately higher oil price. Accordingly, we find limited justification for altering our basic investment outlook, which calls for a broadening of equity market returns by region and sector, stable interest rates and modest further US dollar depreciation.  

We would like to acknowledge the loss of life and the tragedy that accompanies military conflict. The human cost of such actions is immeasurable, and we hope for an expedient peaceful resolution. 

Endnote

  1. Source: Statistical Review of World Energy, 2023.
     

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