Overview

The Israel-Iran conflict remains limited so far, and various constraints suggest it may stay that way. Iran appears open to returning to negotiations, although the risk of escalation—and consequent threats to global oil supplies—remains significant.

Oil Prices and Petrol Impact

Oil prices have risen moderately, currently implying a 10–12 cent per litre increase in Australian petrol prices. However, if supply remains stable, prices should ease. While higher oil prices may stoke inflation, they are more likely to act as a drag on spending—effectively a “tax”—which central banks, including the RBA, are likely to look through.

Middle East Conflicts and Oil

Historically, not all conflicts in the Middle East lead to major oil price disruptions. The key variable is whether oil supplies from major producers are affected. While this latest conflict poses elevated risks, several strategic and logistical constraints may prevent serious supply disruptions.

Current Risk Dynamics

Israel is committed to dismantling Iran’s nuclear program and possibly pursuing regime change.
Iran may retaliate by targeting oil-producing neighbors or shipping through the Strait of Hormuz.
However, limitations in military arsenals, diplomatic pressures, and strategic deterrents (e.g., avoiding direct U.S. involvement) are likely to contain the conflict.
Signs indicate Iran may prefer a negotiated resolution, potentially following further skirmishes.

Probable Scenarios

Base Case (65%): The conflict remains contained, with minimal oil supply disruption. Oil prices may rise in the short term but would present a selling opportunity, while share market dips may offer buying opportunities.
Risk Case (35%): A serious disruption, especially via the Strait of Hormuz, could double oil prices to ~$150/barrel, leading to sharp share market declines. This scenario would likely trigger a forceful U.S. response and be temporary.

Global Economic Impact

While a major oil price spike could reignite inflation fears, it's more likely to restrain growth by reducing consumer spending. Historically, oil shocks have exacerbated—but not necessarily caused—economic downturns. Importantly:

Energy use per unit of GDP has fallen, reducing sensitivity.
Oil prices haven't doubled over 12 months—a key trigger point for past recessions.

Australian Impact

Australians would mainly feel the impact through higher petrol prices. A sustained rise of $US12/barrel would add around $5/week to household petrol bills. Still, this would add just ~0.2% to CPI, which the RBA is likely to overlook given broader inflation dynamics. Australia’s status as a net energy exporter offers some cushion through potential gains in gas export revenues.

Investor Implications

The Israel-Iran conflict adds to market risk, particularly if it escalates and threatens oil flows. However, historical precedent suggests such flare-ups often resolve without lasting market damage. Investors should stay alert for buying opportunities amid volatility. Since WWII, U.S. shares have typically rebounded strongly in the months following geopolitical shocks.

Rick Maggi

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Disclaimer
This article has been carefully prepared by Westmount Securities Pty Ltd (ABN 42 090 595 289, AFSL 225715) for general information purposes only. However, neither Westmount Securities Pty Ltd nor any of its affiliates guarantee the accuracy or completeness of any statements contained herein, including any forecasts. It is important to note that past performance is not a reliable indicator of future outcomes. This material does not consider the specific objectives, financial circumstances, or needs of any particular investor. Therefore, before making any investment decisions, investors should assess the relevance of this information to their individual situation and consult professional advice, taking into account their unique objectives, financial position, and needs.