Escalation with Iran: Oil and Gas Prices Reach New Highs

The renewed escalation between Iran and its rivals continues to shake global energy markets, as the price of oil has jumped above $100 per barrel and natural gas prices in Europe have climbed to peak levels of recent months. Despite this, the Swiss bank Julius Baer estimates that the sharp rise in prices is not expected to last long, and that eventually the parties will return to the path of negotiations. This follows other reviews the bank has conducted in the past.

According to an analysis by Norbert Rücker, head of economics and next-generation research at Julius Baer, the energy market is currently operating out of significant fear following developments in the Middle East, but the conditions that previously led to a reduction in tension still exist. According to him, none of the key players in the region has an interest in the conflict escalating into a broad crisis. Iran depends on continued oil exports to Asian countries, the Gulf states need stability in trade, and the United States is also interested in preventing a sustained jump in fuel prices.

The bank notes that although traffic in the Strait of Hormuz and the Red Sea has been affected by security threats, it is still continuing, and that the oil market has a certain safety cushion thanks to inventories that remained higher than previous estimates. According to the analysts' assessment, the current escalation is intended primarily to strengthen positions ahead of another round of diplomatic contacts, and therefore the risk premium added to energy prices may dissipate if the tension subsides.

The consequences of the jump in oil prices are also felt in the financial markets. Julius Baer notes that the rise in energy prices has become the main factor occupying central banks, especially in Europe, where there is concern about its impact on inflation. However, as long as the rise in oil prices does not significantly permeate the rest of the economy's components, the assessment is that the European Central Bank will not rush to raise interest rates.

In the United States, there was also a reaction in the bond market, as the yield on 10-year government bonds climbed to an 18-month high. Nevertheless, Julius Baer estimates that the Federal Reserve is expected to leave interest rates unchanged at its upcoming meeting, as the latest inflation data do not justify further tightening of monetary policy at this stage. In conclusion, the bank believes that energy markets are currently reacting primarily to fear and uncertainty, but estimates that if a channel for negotiations is reopened, oil prices may also fall quickly.