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Logistical Impacts of Iran-Israel Conflicts

Summary of Impacts

Iran's unprecedented attack on Israel on 13 April, involving over 300 missiles and drones, has heightened concerns about potential economic and geopolitical consequences. Although the attack caused minimal destruction, the world's attention is focused on Israel's response and the potential for further escalation in the Middle East.

A conflict between Iran and Israel could significantly impact oil and gas prices due to potential disruptions in supply and shipping routes. This, in turn, could drive inflation upward and affect global markets, especially since Iran is a major oil producer. An increase in oil prices would also impact countries like India, raising petrol prices and affecting growth, inflation, and trade balances.

Trade and travel disruptions are possible if the conflict escalates, affecting aviation and shipping sectors. Regional airspace closures and flight path restrictions could increase fuel consumption and costs for airlines, impacting trade, particularly Indian exports to Europe.

Gold and other safe-haven assets may experience price increases due to geopolitical uncertainty. Precious metals like gold saw modest gains, while silver experienced more significant increases. Interest rate prospects and central bank responses to geopolitical and inflationary risks will influence the outlook for precious metals.

Iran's increased crude oil production and exports to China add complexity to the situation. The US and UK have imposed fresh sanctions on Russian metals, such as aluminum, copper, and nickel, potentially affecting industrial metals markets. Overall, the economic impact remains uncertain and largely depends on the actions of Israel, Iran, and other involved parties.

Container Shipping

Due to the sudden increase in West Asia tensions following Iran’s attack on Israel, the probability of further choking shipping routes has increased. The main concern for the maritime industry is a potential Persian Gulf shutdown. The Persian Gulf1 is one of the world’s most strategically important choke points. Shipping costs have already gone up by 3 to 4 times compared to pre-COVID and now with the potential new conflict could continue to go up as all ships might have to reroute around the Cape of Good Hope. Not only do prices go up, diverting a ship also adds 12-13 days of additional transit time compared with sailing through the Red Sea. It is possible that supply importing companies will switch to buying from nearer home markets to offset the prolonged shipping costs and time. If the Persian Gulf is closed and other routes are choked, the US, as a net oil exporter, will benefit from higher prices, said an oil industry executive at the Maritime Week on condition of anonymity.

Air Freight

Immediately following the bombing, several countries in the general region, including Jordan, Iraq, Lebanon, and Israel, temporarily closed their airspaces. 2 Many airlines are now considering alternative routes to avoid the potential risks that come with flying over conflict zones.

These rerouted flights cause longer air routes which in turn mean consumption of more aviation fuel and higher airfare pricing. Potential reroutes will overall result in longer routes and higher expenses for flights beginning in Europe, West Asia, and Southeast Asia. Air freight volume to Europe from India and West Asia is expected to rise 10 to 15% and logistics and insurance costs are expected to rise.

Effect on Oil Prices

On Monday morning, oil prices experienced a 1% decline, with West Texas Intermediate (WTI) falling to $84.80 per barrel and Brent crude declining to $89.50 per barrel as of 12 noon (CET). This reaction was influenced by the nature of Iran’s attack. According to Goldman Sachs, Iran’s crude oil production has increased to approximately 3.4 million barrels per day, which is around 3.3% of the global supply. While oil prices currently include a risk premium of $5-10 per barrel due to potential supply disruptions, spikes can occur in response to any escalatory developments.

The most significant impact of a possible war between the two countries would be on oil and gas. Any escalation will push inflation on crude oil prices upwards. Market watchers agree with this observation, saying oil prices could soar to $100 per barrel and beyond. They noted that Iran is the third-largest producer of oil in OPEC and any disruption to it would affect global markets. “Any attack on oil production or export facilities in Iran would drive the price of Brent crude oil to 5 $100, and the closure of the Strait of Hormuz would lead to prices in the $120 to $130 range,” Andy Lipow, president of Lipow Oil Associates, told CNBC.

Another key issue for oil pricing going forward is whether or not shipping through the Strait of Hormuz3 will be affected. Currently, around 20% of the world’s total oil supply passes through the strait.

Contributor: Cali Benetis

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Resources:

https://www.euronews.com/business/2024/04/15/how-irans-attack-on-israel-could-impact-commodities

https://www.firstpost.com/explainers/iran-attack-israel-affect-trade-oil-prices-daily-life-stock-market-gold-travel-trade-13759750.html

https://economictimes.indiatimes.com/industry/transportation/shipping-/-transport/iran-israel-conflict-shipping-industry-set-for-tougher-times-ahead-due-to-west-asia-tensions-say-experts/articleshow/109307885.cms?from=mdr

https://www.strausscenter.org/strait-of-hormuz-geography/