Navigating Oil Prices: Insights on the Middle East Conflict and Global Economies

As week 3 of the conflict in the Middle East.

Oil prices remain elevated even after coming off recent highs.

Now global energy markets are seeing resistance to governmental intervention efforts, and this is despite the decision by the US to release approximately 40% of its strategic petroleum reserve coupled with a coordinated 400 million barrel release from the IAEA crude prices do remain elevated.

Now, are the release volumes in sufficient to offset the supply currently?

Experiencing a backlog in the Strait of Hormuz.

Well joining me this morning to weigh in is Ken Wattret, VP, Global Economics at S&P Global Market Intelligence.

Good morning, Ken.

Thank you so much for joining us.

So in New York morning trade, we are looking at WTI below 100, but Brent is back above the 100 level now the recent coordinated intervention by global organizations as well as nation states.

Do you think there are insufficient given the uncertainty regarding the conflict moving forward?

Well, I think the oil price would tell you is insufficient.

If we'd seen any concerted action which was likely to, you know, clear the traffic building in the Strait of Hormuz and was addressing the potential risks surrounding restarting oil production in some key areas of the Gulf, then we would have seen a, you know, a lasting decline in, in oil prices, and we haven't seen that.

So that's telling us that there's a way to go before we've got some clarity on the way forward.

And Ken, as you mentioned, there are worries about rising energy prices and the impact on global economies.

Now we know that this week is a big week for global central banks as we have the ECB, BOE, BOJ, as well as the Federal Reserve meeting.

So what immediate mechanisms remain for policymakers to stabilize prices, if at all?

Well, I think we need to differentiate between the fiscal levers and the monetary policy responses.

You know, on the fiscal side we've already seen some governments announce measures announced measures to try and mitigate the impact of higher energy prices on households.

I'm sure we'll see more of those the longer this uncertainty continues.

On the monetary policy side, you know, the big issue is how central banks should react to what looks like being a jump in inflation rates because of these higher energy prices.

Now our assumption would be if this is a temporary effect and it's only driven by energy prices, then the major central banks around the world will probably look through it.

They're focused more on the second round effects, so the pass through into costs more generally in the economy and other prices, and also the impact on inflation expectations.

And for that also we're looking at, you know, potential labor market conditions and the possibility of a pickup in in wage growth and unit labor cost growth rates.

For the moment the central banks want more information.

They're probably going to sit on their hands, but it wouldn't surprise me if we had some signals that they were.

You know, trying to make clear to markets that they would react if they considered this to be a significant inflation shock.

And bear in mind after the Russia-Ukraine conflict, you know, the major central banks were very late in responding to the pickup in inflation pressures.

They probably think that's a mistake looking back with the benefit of hindsight.

So this time around they'll probably be keen to signal to markets that they won't make the same mistake again.

Yeah, and Ken, you bring up a lot of key points there because when it comes to policy, there are a lot of moving parts in geopolitics and politics, but the Asia Pacific region is particularly vulnerable due to energy dependence.

So how significantly do you expect the economies as well as the US economy to be impacted given that the US is a net energy exporter?

Well, that, that point that you've highlighted is a, is a really important one.

You know, the, the implications of this situation for different economies will, will vary.

You know, it's partly due to their reliance on energy supplies from the Gulf.

Um, and it's partly, of course, due to other factors, as mentioned, how central banks respond, uh, and so on.

Now, I think for, you know, many of the large economies in the Asia-Pacific region, they're vulnerable because of their high reliance.

And on energy supplies from the Middle East and so at face value they're potentially some of the economies most directly affected by what's been happening now.

Some of them have quite a lot of fiscal space.

I mean, as mentioned, you know, it's possible that governments can introduce measures to try and mitigate the effects of these rising energy prices on households and businesses, and I'm sure we'll see that in the region.

Also, you know, some economies are net energy.

And exporters, many in the in the Asia Pacific region, many are net energy importers, sorry, in, in, in that region.

Many are net energy exporters and for those, although, you know, there is a negative impact from higher energy prices on households through higher inflation and squeeze on real incomes, there's a net positive.

Um, in some cases, because the higher oil price is a big positive for their exports of energy products.

So we need to be quite careful in how we distinguish between these structural factors that influence the potential economic effects of this situation.

Yes, and Ken, finally, before I let you go, I do want to ask you about your expectations for Fed Chair Jay Powell.

So the two day Fed meeting kicks off today, and of course we're not expecting any change in terms of interest rates tomorrow, but of course we are awaiting Powell's speech at his press conference and the summary of economic projections.

So what is key as we head into tomorrow afternoon?

Well, futures markets are pricing in, you know, near 100% likelihood of no change in rates, which makes sense.

You know, the central banks need more time to assess what's going on.

You know, the signal for markets will really come from whether there's an emphasis on inflation risks and the potential for the Fed to react to those, or there's an emphasis.

On what's been happening in the labor market, because obscured by all of the understandable focus on developments in the Middle East, the employment numbers for the US have continued to come in on the weak side.

So probably the initial market reaction will depend on whether the Fed's bias is tilted more towards those inflationary concerns or more towards their worries about labor market conditions.

Well, a lot to keep our eyes on.

So, Ken, thank you so much for joining us this morning and thank you so much for sharing all of your insights.

Thank you.