This is why the Iran War is hitting your bills and what might happen next
Last night’s last-minute ceasefire is a reprieve that has sent commodity prices tumbling and stock markets soaring, writes Anna Macdonald
For the last three years, energy prices had been gently falling.
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The chaos that followed Russia's invasion of Ukraine had settled; demand from China and Europe had remained weak. Even Hamas's attacks on Israel in 2023 and last year's brief Israel-Iran confrontation barely moved the oil price.
That calm ended in late February. US and Israeli forces struck Iran, Iran responded, and the oil price, sitting in the low $60s just weeks earlier, doubled.
The Straitjacket of Hormuz
The reason comes down to one narrow stretch of water. Around 20 million barrels of oil pass through the Strait of Hormuz every day, a fifth of global supply. Iranian threats and direct attacks on tankers brought that traffic to a near standstill. Gulf producers, with nowhere to send their output, were forced to cut production. The Iranian regime exerted further pressure by hitting those countries’ refining infrastructure.
Stepping back from the brink
President Trump initially shrugged off $100 oil as a "small price to pay" for US and global security, promising prices would "drop rapidly" once the Iranian nuclear threat was eliminated and the regime had been changed.
Trump knows the politics here. A cost-of-living crisis hurts American voters, and it hurts Republicans' chances in November's midterm elections. A Democratic Congress would be the last thing Trump wants: it would block his agenda and, potentially, impeach him for a third time. Over the weekend, Trump ramped up the bellicose language and threatened to target Iran’s civilian infrastructure.
Last night’s last-minute ceasefire is a reprieve that has sent commodity prices tumbling and stock markets soaring.
Will it hold? What happens now?
The Iranian command has been destabilised and decapitated. Israel has different objectives from the US. Trump has revealed new levels of aggression and truculence. Risks abound, so markets, producers, and insurers will all remain nervous.
It will take time for production to return to normal. Higher prices will likely continue to dampen demand and economic growth, putting pressure on Central Banks to keep interest rates higher.
History suggests a reset rather than a return to the old normal. Energy shocks should lead countries to build local resilience by diversifying supply, expanding storage capacity, and boosting domestic production. The US spent the last two decades becoming a net energy exporter precisely because of earlier shocks. China has built up vast coal reserves and is racing ahead on batteries and nuclear. Europe has built significant wind and solar capacity, though it needs more stable sources of non-intermittent power – gas and nuclear - to be truly resilient.
A different energy complex may be closer than we think, and the rewards would be rich.
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Anna Macdonald is an Investment Manager for Aubrey Capital Management.
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