Blasé Capital SP(OIL)S  of WAR

Over the past five trading sessions, the Sensex, the Bombay Stock Exchange index, was down by almost 3,000 points, before it recovered a bit to close at just over 80,000 points on Monday. More than 2,000 points were shaved off in the last two trading sessions, obviously due to the joint US-Israel attacks on Iran, and retaliation by the latter on the US bases, and other locations like airports in the Middle East. Iran closed the Strait of Hormuz, which accounts for the sea transport of a fifth of the global crude oil supplies, and the bulk of the shipments to Asian nations such as India, China, Japan, and South Korea.

There are several reasons to explain the jitters among the investors. They encompass macro factors, as well as micro, and sector-related ones. Economists feel that if the Iran war lingers on, and along with the ones in Ukraine, and Afghanistan-Pakistan border, the global economy may walk into a recession. If the Strait remains closed for a few days, or a week, most analysts feel that a global recession is a certainty. It can easily reduce growth in the Eurozone by a minimum 0.5 per cent,

and have a larger impact on the Asian economies, especially India.

In addition, inflation is likely to raise its ugly head. Most experts feel that the transmission from high crude prices, now expected to jump over $100, and even up to $130 due to a prolonged war, to inflation and high prices due to its multiplier effect will be immediate. In Europe, if oil is at $100, the prices may jump up by a minimum 0.7 per cent, and the impact on India may be a 1-2 per cent increase due to other factors such as supply and logistics constraints. Oil at $130 can push up the US inflation to 4.5 per cent, and 4 per cent in Europe.

According to a media article, “For Europe, the timing is brutal. The Eurozone has just achieved its 2 per cent inflation target in December (2025) after three years of battling price pressures that peaked over 10 per cent. The ECB (central bank) has held rates at 2 per cent for four consecutive meetings, and growth projections for 2026 had been revised upwards on the back of Germany’s Euro 500 billion fiscal expansion, and improving domestic demand. An energy shock from the Gulf threatens to undo that progress in weeks.”

Energy security of various consuming nations will be hampered, and the risk premiums on oil will shoot up. China will seek to dip into its inventories and strategic reserves, and seek alternate supply routes. India will do the same, and the US Supreme Court judgment on the president’s trade tariffs, along with the Iran war, may spur New Delhi to re-rely on Moscow for crude supplies. India has a valid excuse to depend on any and every source possible, and not listen to the US.

Iran has invariably been the epicentre of regime changes, which disrupted the global oil markets several times in the past 50 years. In 1979, after the Islamic revolution led to a regime change, crude prices more than doubled, and “Iranian production never recovered. If history is any guide, the economic consequences of this conflict will outlast the military campaign regardless of how quickly a ceasefire is reached.” After the death of Iran’s supreme religious leader, Khamenei, a regime change looks more likely, even though the clerics are striving to look for an immediate replacement, with societal changes.

Other lessons from history are crucial. In the recent past, global crude oil prices have witnessed huge volatility. In late February 2022, after Russia attacked Ukraine, they zoomed to $100, and reached $130 within a month. Subsequently, they came down drastically, and reached a low of less than $60, as Russian oil continued to reach the consumers despite the western sanctions, and Europe shifted to traditional sources like coal that were earlier shut. Similarly, in 2008, oil peaked at $145 just before the Great Recession, and later crashed to $40. Hence, pessimism can quickly turn to optimism.

Obviously, the mindset of the producers and consumers are different. The former will aim to use the short-term adverse impact to rake in higher profits, as will the global oil giants. They will want the prices to remain at $75 or higher for several months. The consumers will dip into existing reserves, and hope for the best. If they can somehow ride through the short-term shocks, they will benefit from lower prices due to sudden oversupplies, and higher production. The situation is tricky for the large producer-consumers like Europe and the US.

Setbacks in equities may prove to be positive for the bullion. Over the past few years, especially since the Great Recession in 2008, experts pointed at a unique trend of bullion and stocks showing similar trajectories. Generally, it is believed that gold moves up when equities are down, and vice versa, as the yellow metal is a hedge against stocks. But both have gone up in the past decade or so. This convergence may now return to the traditional divergence, at least for some time. Gold prices jumped nearly six per cent in the past week.