By François Rimeu, Senior Market Strategist, Crédit Mutuel Asset Management
Crédit Mutuel Asset Management is an asset management company of Groupe La Française, the holding company of the asset management division of Crédit Mutuel Alliance Fédérale.
Israel’s attack on Iran, which began on June 12, has so far had a limited impact on markets. What are markets pricing in? Do we agree with them? What are the possible outcomes? Let us review these different questions.
At the time of writing (06/16), markets have reacted as follows:
- Equity markets have returned to their pre-attack levels;
- Currencies have remained relatively stable;
- Crude oil prices are up 7 to 8%, and interest rates have risen by 5 to 10 basis points depending on the region and duration.
- This rather subtle market reaction seems to be based on the assumption that this conflict will remain local and will not cause a lasting shock to oil production. We tend to agree with this for the following reasons:
1. Iranian oil production is 3.3 million barrels per day (Mb/d), and if we look at the production low in 2021, it had fallen to 1.7 Mb/d. The potential drop in production in this scenario would thus be between 1.5 and 2 Mb/d (about 1.5% of global production), which would not be sufficient to destabilize the supply-demand balance. OPEC+[1] would indeed have the capacity to increase production if necessary, since Saudi Arabia alone has a little less than 2 million barrels per day of spare capacity.
2. These production facilities have so far not been targeted by Israel, which has confined its strikes to military or nuclear installations.
3. The closure of the Strait of Hormuz constitutes the main risk today, but this does not seem likely. A blockade of this strait would reduce oil trade by about 15% and could push the price per barrel above 100USD, which would be very destabilizing. However, this is a dangerous option for Iran. On the one hand, because it would prevent Iran from exporting oil to its main partner, China, and the timing does not seem right to enter into conflict with them. On the other hand, because closing the strait would trigger an immediate reaction from the United States, a risk that Iran cannot afford today.
Options seem limited in the short term for Iran, which lacks the support of its historical allies (Hezbollah, Russia, Syria), and the only alternative capable of destabilizing its opponents — the closure of Hormuz — seems unlikely today. In the event of a conflict that does not escalate, the price of a barrel of oil would gradually return to the $55–$70 range and would therefore not have a lasting impact on inflation. Therefore, we are maintaining our allocations, which remain broadly neutral on equities and positive on Eurozone bonds. We will adjust our positions as necessary as the situation evolves.
