LONDON(Reuters) -Brent crude oil is up around 20% so far in June, and set for its biggest monthly jump since 2020 as Israel/Iran tensions flare-up.
Although relatively contained, the rise has not gone unnoticed just three years after Russia’s invasion of Ukraine triggered a surge in energy prices that ramped up global inflation and sparked aggressive interest rate hikes.
Here’s a look at what rising oil means for world markets.
1/ HOW HIGH?
Oil prices have crept rather than surged higher with investors taking comfort from no noticeable interruption to oil flows.
Still, pay attention.
The premium of first-month Brent crude futures contract to that for delivery six months later this week rose to a six-month high as investors priced in an increased chance of disruptions to Middle East supply. It remained elevated on Friday.
Trading at around $77 a barrel, oil is below 2022’s $139 high, but is nearing pain points.
“If oil goes into the $80-100 range and stays there, that jeopardizes the global economy,” said ABN AMRO Solutions CIO Christophe Boucher. “We are just below that threshold.”
2/ SUPPLY SHOCK?
Traders have an eye on shipping, often seen as a key energy bellwether.
About a fifth of the world’s total oil consumption passes through the Hormuz Strait between Oman and Iran. Disruption here could push oil above $100, analysts say.
Blocked shipping routes would compound any supply shock. Though the big oil producing countries that make up OPEC+ have promised an extra 1.2 million barrels a day, none has yet been shipped or delivered, said hedge fund Svelland Capital director, Nadia Martin Wiggen.
Blocked shipping routes would mean this expected supply would not come into the international market, she said.
She’s watching freight rates closely.
“So far, freight rates show that China, with the world’s biggest spare refining capability, hasn’t started panic buying oil on supply concerns,” said Wiggen.
“Once China starts to buy, freight rates will rise, and world’s energy prices will follow.”
3/ NO OIL, NO GROWTH
Rising oil prices raise worries because they can lift near-term inflation and hurt economic growth by squeezing consumption.
High oil prices work like a tax, say economists, especially for net energy importers such as Japan and Europe as oil is hard to substitute in the short term.
Lombard Odier’s chief economist Samy Chaar said that sustained oil prices above $100 a barrel would shave 1% off global economic growth and boost inflation by 1%.
Unease rose after Israel launched its strike on Iran a week ago. An initial rally in safe-haven bonds soon evaporated as focus turned to the inflationary impact of higher oil.
