Financial markets nervous amid Middle East tensions; oil price falls – business live

Goldman Sachs analysts estimate that the oil price currently includes a risk premium of between $5 and $10 per barrel, to reflect risks to supplies from geopolitical shocks.

In a research note this morning, Goldman explain that the Brent crude price (at around $90/barrel this morning) is around $10/barrel higher than predicted by a model assuming no new disruptions to oil supply.

They say:

While the geopolitical risk premium—the compensation investors demand for the risk that geopolitical shocks reduce oil supply—is difficult to estimate, our rough estimate informed by our pricing framework and the cost of hedging would be around $5-10/bbl.

The cost of insuring against oil price spikes has picked up following attacks on Russian refineries and rising Iran-Israel tensions but has remained less elevated as of Friday than in October 2023 and in 2022 because Middle East crude production remains unaffected by the war.

Goldman add that they are focused on several potential risks:

• OPEC+ may extend the existing production cuts further in a context of increased tensions between the West and several key OPEC+ countries.

• The Middle East or Russia-Ukraine conflicts may damage upstream, midstream, or downstream oil infrastructure (as has happened to Russian refineries).

• Iranian oil supply may decline on disruptions or under a potentially more hawkish US Administration.

• While still highly unlikely, we estimate that an interruption of oil flows through the Strait of Hormuz, through which currently 17% of global oil production flows, would lead oil prices to rise 20% in the first month and eventually double if the interruption persisted for several months. Iran’s seizure of a cargo ship near the Strait of Hormuz may keep some focus on the risks to that shipping lane.

After 90 minutes trading, London’s stock market is lagging behind the rest of Europe.

The FTSE 100 is currently down 42 points, or 0.5%, at 7953 points, dragged down by losses among oil companies BP and Shell, and precious metals producer Fresnillo.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, says the week has started on a “fraught note”, with unease still clouding sentiment.

Investors are on alert for retaliatory action following Iran’s attack on Israel. Fears are brewing that a dangerous new episode of escalating conflict is about to roll. All eyes are on diplomatic efforts being made to diffuse the situation which have helped bring down a spike in oil prices.

The FTSE 100 has been on the back foot in early trade, retreating away from record levels which the index flirted with on Friday. Although defence company BAE Systems has gained fresh ground amid expectations of higher military spending, energy stocks are on the back foot, as oil prices have retreated a little.

Across Europe, the picture is brighter, with Germany’s DAX up 0.8% and Italy’s FTSE MIB gaining 1%.

Israel’s stock market has opened sharply higher.

The Tel Aviv 35 index has jumped by 1.4% in early trading today, led by gains among financial, basic materials, real estate and industrial stocks.

Israel’s currency, the shekel, is strengthening in early trading.

The shekel has gained over 1.2% against the US dollar to hit 3.7128, its strongest level since last Wednesday.

Reuters attributes this to relief that “Israel has not yet struck back at Iran, following Saturday’s attack.

The London stock market is open… and stocks are a little lower at the start of trading.

But it’s certainly not a big selloff. The FTSE 100 index has only dropped by 20 points, or 0.25%, to 7976 points.

Aerospace manufacturer Melrose were the top riser at the open, up amost 1.5%, with weapons producer BAE Systems up 1.4% – a sign that traders expect defence spending to remain benefit from current tensions.

Mining stocks and banks are also higher in early trading.

But oil companies are on the slide, with BP (-1.6%) and Shell (-1.3%) among the big fallers, indicating anxiety over crude supply disruption is fading.

European stock markets have risen at the open.

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

The financial markets are in a nervous mood this morning, as investors fear escalating tensions in the Middle East after Iran’s military strike on Israel last weekend.

Many Asia-Pacific stock markets have fallen into the red, with Japan’s Nikkei losing almost 1% today, amid fears that open warfare could erupt in the region.

But there’s also relief that Iran’s first ever direct attack on the Israeli state did not cause more damage, with almost all the drones and missiles intercepted, leading to hopes that further retaliation and escalation could yet be avoided.

The oil price, a bellwether for Middle East tensions, has dropped slightly this morning. Brent crude is trading around $90 per barrel – away from last Friday’s six-month high of $92/barrel.

Risk appetite is better this Monday morning than it was last Friday when the world was bracing for Iran’s retaliation on Israel, reports Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

Iran fired more than 300 drones and missiles on Israel on Saturday night, but only a small number reached Israel, limiting damages. There were no fatalities, just an army base was slightly damaged.

Good news is Tehran called the operation a success and declared that it won’t take further actions unless Israel responds.

Israel signalled last night that it would not immediately act alone, but also says its forces remain on high alert:

Reports that President Joe Biden has told Israel’s prime minister Benjamin Netanyahu that the US wouldn’t support any Israeli counterattack against Iran suggest there is more caution about an escalation.

This uncertain backdrop means that markets haven’t sold off further this morning relative to Friday, explains Deutsche Bank strategist Jim Reid, who told clients this morning:

Since last Friday, geopolitics has returned as the biggest concern for markets, as investors react to Iran’s attack on Israel over the weekend.

But since markets have reopened after the weekend, the reaction among key assets has been subdued, with investors hopeful that any escalation will prove contained.

The agenda

• 10am BST: Eurozone industrial production for February

• 12.15pm BST: BoE deputy governor Sarah Breeden gives keynote speech at the Innovate Finance Global Summit 2024 “The outlook for payments innovation”.

• 1.30pm BST: US retail sale for March

• 3pm BST: NAHB’s US housing Market Index