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Business News/ Markets / Stock Markets/  OPEC cuts and geopolitical tensions propel Brent crude up by over 13% in 2024; central banks face inflation challenge

OPEC cuts and geopolitical tensions propel Brent crude up by over 13% in 2024; central banks face inflation challenge

Brent crude futures surged 13.4% to $87.26/barrel due to Middle East tensions, OPEC cuts, attacks between Ukraine and Russia, and rising oil demand.

Increasing tensions in West Asia, particularly the ongoing conflict between Iran and Israel, have sparked concerns regarding the potential closure of the Strait of Hormuz (SoH) by Iran. (AP)Premium
Increasing tensions in West Asia, particularly the ongoing conflict between Iran and Israel, have sparked concerns regarding the potential closure of the Strait of Hormuz (SoH) by Iran. (AP)

Brent crude futures have surged 13.4% this year so far to $87.26 per barrel, propelled by escalating tensions in the Middle East, OPEC supply cuts, attacks on energy infrastructure between Ukraine and Russia, and increased oil demand from major consuming nations, all of which have tightened the market.

In March, Brent crude futures surged over 8%, marking the most significant monthly increase since July 2023. In the current month, they have touched $92.10 per barrel, the highest level in six months, driven by heightened tensions between Iran and Israel, adding additional volatility to prices.

Also Read: Iran, Israel tamp down Middle East war fears with muted responses | 10 points

On April 19, Brent futures soared by 4% during intraday trading following an attack that reignited concerns about potential disruptions to oil supplies due to a broader regional conflict.

According to two US officials, Israel carried out a strike on Iran, although the Islamic Republic's state media reported the attack as unsuccessful. These strikes followed Tehran's unprecedented bombardment on April 13.

Iran is the third largest producer in the Organization of the Petroleum Exporting Countries (OPEC) cartel, which has already been a target of Western sanctions, however, if the supply is disrupted due to the ongoing war, it could cause a surge in international crude oil prices.

According to Bloomberg Intelligence, the direct war between Israel and Iran may cause crude to hit $150 a barrel if it severely hits production. Brent crude prices hit $100 per barrel in 2022 and spiked to around $139 following Russia's invasion of Ukraine, marking their highest level since 2008. 

Trade tensions

Increasing tensions in West Asia, particularly the ongoing conflict between Iran and Israel and the expected sanctions, have sparked concerns regarding the potential closure of the Strait of Hormuz (SoH) by Iran. This crucial waterway, situated between Oman and Iran, is one of the world's most vital and strategic maritime routes.

The SoH is a narrow sea passage that is 40km wide at its narrowest point, with 2km of navigable channels for incoming and outgoing ships. It is the key route through which Saudi Arabia, the UAE, Kuwait, Qatar, Iraq, and Iran export crude oil.

Also Read: Iran's crude oil output up 20% in 2 years at 3.3% of global supply: What does this mean for the Iran-Israel proxy war?

The Strait of Hormuz (SoH), responsible for transporting approximately one-fifth of the world's crude oil, has never been completely closed, but tensions in the region escalated in 2017 when then-President Donald Trump accused Iran of attacking two oil tankers.

Domestic brokerage firm Motilal Oswal in its latest report projects that if Iran successfully enforces a complete or partial blockade of the SoH, it will lead to a substantial increase in crude oil prices, refining gross refining margins (GRM), and spot LNG prices.

Although alternative routes exist, they may only have the capacity to accommodate a fraction (approximately 7-8 million barrels of oil per day (mnbopd) of crude oil and refined products) of the volume currently passing through the SoH (approximately 21 mnbopd), and that too at elevated freight costs, said the brokerage. 

While investor attention may primarily focus on oil, Motilal Oswal believes that spot LNG prices will experience an even sharper escalation in the event of a SoH closure due to the absence of viable alternative routes.

Meanwhile, the US House passed new sanctions on Iran’s oil sector set to become part of a foreign-aid package, putting the measure on track to pass the Senate within days. 

The proposed sanctions on Iran target foreign ports, vessels, and refineries involved in processing or shipping Iranian crude in violation of existing U.S. sanctions, Bloomberg reported.

Additionally, these sanctions extend to cover all transactions between Chinese financial institutions and sanctioned Iranian banks engaged in purchasing petroleum and oil-derived products, expanding what is known as secondary sanctions, the report showed. 

Also Read: US may sanction Israeli unit over abuses, Biden denounces campus ‘anti-semitism’

Despite previous rounds of sanctions on Iran, the country has managed to boost its oil exports significantly, with the majority of shipments heading to China.

Data from Vortexa, as cited by The Financial Times, indicates that Iran's crude exports reached their highest level in six years during the first quarter of this year. Throughout this period, the daily average stood at 1.56 million barrels, the bulk of which was destined for China, resulting in Tehran earning approximately $35 billion.

On the other hand, the EU is also preparing sanctions on Iran in response to the missile attack on Israel.

Challenges for central bankers

As crude oil prices continue to rise and expectations of an increase in gas prices mount, major central bankers confront challenges in guiding inflation towards target levels. 

The surge in oil prices and the uncertainty surrounding gas prices exacerbate the complexity of economic dynamics, adding further pressure on policymakers.

The continuous increase in oil prices holds significant implications, particularly for nations heavily dependent on dollar-denominated energy imports. The risk stemming from a substantial surge in oil prices goes beyond the gas pump, potentially setting off a chain reaction that affects food prices and various other commodities.

Such a scenario could lead workers to push for higher wages, reigniting the inflation cycle that many policymakers outside the US believed they had successfully managed to control.

Also Read: Israel-Iran tensions threaten to send oil, LNG prices soaring, say experts

The International Monetary Fund (IMF) has described an "adverse scenario" in which an escalation of conflict in the Middle East would lead to a 15% jump in oil prices and higher shipping costs that would hike global inflation by about 0.7 percentage points.

Major central banks are currently maintaining historically high interest rates, with U.S. rates sitting at 23-year peak and the ECB held its main refinancing rate at 4.5%, which stands at its highest level in 22 years. 

These unprecedented rate levels reflect the cautious stance adopted by policymakers to curb inflationary pressures and stabilise financial markets amid global uncertainties. 

Meanwhile, the stronger-than-expected March inflation print has forced the Federal Reserve to reset the clock on its first interest rate cut and re-evaluate the trajectory of price growth. 

Back in India, the repo rate has remained at a 5-year high throughout the fiscal year of FY24, as the Reserve Bank of India (RBI) maintained a status quo. In its first Monetary Policy Committee (MPC) meeting of 2025, the RBI opted to keep rates unchanged.

According to the minutes of the latest monetary policy meeting, inflation continues to remain the main concern for the Reserve Bank of India's monetary policy committee members before the RBI goes ahead and loosens its stance on key interest rates.

Last week, U.S. Federal Reserve Chairman Jerome Powell emphasised that it may take longer than anticipated to build the confidence necessary for rate cuts, disappointing expectations of more than two cuts in 2024. Some analysts anticipate that the Fed will uphold higher rates throughout 2024.

There is growing apprehension among Fed officials that elevated borrowing costs may not be sufficiently curbing demand, fueling concerns among investors and analysts that the central bank may need to consider further rate hikes.

New York Fed President John Williams, who describes current policy as restrictive, said that raising rates is not his baseline expectation. But he added that it’s possible if the economic data warrant higher rates to reach the Fed’s inflation goal. 

Chile’s central bank president, Rosanna Costa, said plans to extend one of the world’s biggest rate-cutting cycles remain intact as policymakers have already incorporated new global risks into their outlook.

In its Regional Economic Outlook for Europe, the IMF said central banks across central, eastern, and southeastern Europe should keep interest rates higher for an extended period of time as inflation remains elevated.

Tight labor markets and wage growth above 10% across the region will add to price pressures, the IMF stated.


Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.

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Published: 23 Apr 2024, 12:30 PM IST
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