Is there a risk to energy and freight rates from escalating Gulf tensions?

By Jane Byrne

- Last updated on GMT

© GettyImages/belterz
© GettyImages/belterz

Related tags freight Middle east Israel Iran

The recent escalation in the Middle East conflict presents a significant risk to energy and freight rates in the medium term, with potential repercussions for agricultural markets, finds the CRM Agri Agricultural Economic report.

That review is designed to provide an economist's perspective on the broader market and trends that impact agricultural commodity markets, as well as the implications of key indicators for prices.

Iran's airstrike on Israel and Israel's vow to retaliate are expected to drive crude oil prices even higher, note the analysts.

International pressure to restrict Iranian crude oil imports or disrupt Iran's export capabilities could further elevate market tensions, potentially removing 1-2 million barrels of crude oil from daily circulation, they believe.

“Now that Iran has put itself on the frontlines of the war with Israel, the probability of crude oil prices breaking above US$100/bbl has risen significantly.”

Crude oil prices, particularly Brent and WTI, have been steadily climbing since January 2024, breaching US$90 per barrel for Brent and US$85 per barrel for WTI. While geopolitical factors have influenced prices to some extent, the primary drivers, however, have been anticipation of US interest rate cuts, ongoing Russian crude oil sanctions, production cuts by OPEC+, and stronger-than-expected global economic growth, finds the report. 

Freight rates

With the conflict in the Middle East ramping up in October 2023, traffic through the Suez Canal has plummeted by around 50%, necessitating costly rerouting of tankers around the Cape of Good Hope.

“Those tankers have had to change routes and travel the Cape of Good Hope, a more costly route. Iran has the potential to cut off the Strait of Hormuz—responsible for shipping 20% of global crude oil—any disruptions would send both freight and oil prices soaring. Higher oil prices also lead to higher bunker fuel prices, which would amplify freight rates and could have a significant impact on grain trade.”

Additionally, market sentiment toward US interest rates has been a focal point in recent weeks. While early April statements from the Federal Reserve hinted at a potential rate cut in June 2024, March's inflation data, slightly higher than expected at 3.5%, and notably higher than February's 3.2%, have introduced some uncertainty into the market, according to the CRM Agri outlook.

Ag markets

Nevertheless, the analysts report that, in the past month, the global economy has exhibited increased resilience, marked by a surge in the Global PMI, a key gauge of global economic expansion, reaching its highest point since June 2023.

And despite agricultural prices remaining relatively low, improving prospects for global growth are bolstering commodity demand.

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