El-Erian: Rising oil price risks ‘classic stagflationary shock’
The jump in the oil price today, following Israel’s attack on Iran, is a “bad shock for the global economy at a bad time”.
That’s the warning from Mohamed El-Erian, President of Queens’ College, Cambridge, and advisor to insurance giant Allianz.
Speaking to Radio 4’s Today programme, El-Erian explains that a higher oil price can lead to a “classic stagflationary shock”, undermining economic growth and fuelling inflation.
El-Erian says:
For the average consumer, they will be looking at more income uncertainty. They will be looking at higher petrol prices, and in the UK, they’re probably looking now at higher risk of taxation in October.
[reminder: economists are already warning that Rachel Reeves may need to raise taxes in the autumn budget, to keep within her fiscal rules]
He also suggest that the probability of interest rate cuts has fallen, which will disappoint president Trump who has been demanding lower borrowing costs.
The fact the US says it was not involved in Israel’s attacks means they are “another shock to the stability of the US-led the global economic order”, which was already facing questions, El-Erian adds, saying:
So whatever way you look at it, it’s negative short term, it’s negative longer term.
Key events
Wall Street stocks hit by Israel-Iran crisis
The New York stock market has dropped at the start of trading, following losses in Europe and Asia-Pacific markets.
The news that Israel attacked Iran overnight has sparked a wave of selling, pushing the main indices into the red.
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Dow Jones industrial average: down 480 points or 1.1% at 42,487 points
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S&P 500: down 41 points or 0.7% at 6,003 points
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Nasdaq Composite: down 156 points or 0.8% at 19,505 points.
As in the UK, airline stocks are falling sharply, but oil company shares are higher, tracking the rise in crude oil prices today.
The surge in the oil price (currently up 8% today) means crude prices are on track for their 19th largest weekly rise since 1988, according to Deutsche Bank’s Jim Reid.
He’s kindly created this chart, putting this week’s rise in the oil price in context:
Reid writes:
There were previous direct attacks between Iran and Israel in April and October of 2024, but this is much bigger in scale, with several senior Iranian military officials widely reportedly to have been killed. For markets, the focus is now turning to how the situation might escalate, given that Iran have pledged to retaliate, and President Trump has said that without a deal “it will only get worse!” This is raising genuine fears about a wider conflict, with the risk that the United States is also dragged in.
From a market point of view, this is highly significant, although as the chart shows, the oil move today doesn’t look quite as big in historic terms. On a weekly basis, Brent crude is on track for the 19th largest climb since 1988 and as it stands is hovering around the top 50 in terms of single-day moves over the same period. Although at just before 4am London time we were at the 12th biggest daily jump.
In a year of shocks, high volatility, but very strong performance in many areas (especially for non-US equities), it’s another curveball to throw into the mix. It’s probably yet another weekend to keep an eye on the news!
As I type, Brent crude is changing hands at $74.90 per barrel, up from $66.47 at the end of last week.
Greece and Britain have advised their merchant shipping fleets to avoid sailing through the Gulf of Aden and to log all voyages through the Strait of Hormuz after Israel’s large-scale attacks on Iran on Friday, documents seen by Reuters showed.
Greek ship owners were urged to send details of their vessels sailing through the Strait of Hormuz to Greece’s maritime ministry, according to one of the documents issued by Greece’s shipping association, which was sent on Friday.
It says:
“Due to developments in the Middle East and the escalation of military actions in the wider region, the (Greek) Ministry of Shipping … urgently calls on shipping companies to send … the details of Greek-owned ships that are sailing in the maritime area of the Strait of Hormuz”.
All UK-flagged vessels, which include the Gibraltar, Bermuda and Isle of Man ‘red ensign’ registries, were advised to avoid sailing through the southern Red Sea and the Gulf of Aden, a separate document issued by the UK’s transport ministry said.
If transiting these areas, vessels must adhere to their highest level of security measures and limit the number of crew on deck during transits, said the advisory, seen by Reuters.
Airlines were the worst-performing sector in Europe, after several countries in the Middle East close their airspace to commercial flights today.
In Europe, Air France-KLM (-4.5%), Deutsche Lufthansa (-3.4%) and British Airways parent IAG (-4.2%) are all among the big fallers today.
In Asia, Japan Airlines Co. dropped 3.7%.
Turkish Airlines has dropped over 6% in Istanbul.
Prices of copper and other industrial metals have fallen today, as investors sold risky assets after Israel’s attack on Iran.
Benchmark three-month copper on the London Metal Exchange shed 1.3% to $9,575 a metric ton this morning, the weakest since 3 June, Reuters reports.
A rising oil price could make it harder for central banks to cut interest rates this year, warns Kathleen Brooks, research director at XTB:
“If the oil price continues to climb towards $100 in the coming days, then we could see the interest rate futures market price out rate cuts from the US and Europe, which may add to downside pressure on stocks.
“However, if there is no nuclear escalation, then we think we could see oil prices settle back around $70 per barrel.”
Goldman Sachs is sticking with its assumption that there will not be disruption to oil supplies in the Middle East.
The Wall Street bank says that its adjusted summer 2025 forecasts include “a higher geopolitical risk premium”; even so, it still forecasts that strong supply growth outside US shale will lower oil prices.
Goldman forecasts that Brent crude will fall to $59 per barrel in the fourth quarter of this year, and average $56/barrel in 2026.
But, prices would be higher if oil supplies from Iran were disrupted.
Goldman explains:
While our base case is that the geopolitical risk premium will decline if oil supply is unaffected, geopolitical risks have risen sharply, and we estimate the upside price risk in alternative scenarios.
The first scenario assumes that any potential damage to Iran’s export infrastructure reduces Iran supply by 1.75mb/d during 6 months before gradually recovering. Making the additional assumption that extra core OPEC+ production makes up half of the peak Iranian shortfall, we estimate that Brent jumps to a peak just over $90/bbl but declines back to the $60s in 2026 as Iran supply recovers.
[Although the US currently imposes sanctions on Iran’s oil industry, it still exports crude to countries such as China].
Update: Oil up 9%
The oil price remains sharply higher today, as tensions in the Middle East alarm investors.
Brent crude is currently up 9% today at $75.55 per barrel, on track to close at its highest level since February. US crude is also up 9% at $74.32 per barrel.
Tamas Varga, analyst at oil broker PVM (which is part of interdealer broker TP ICAP), says it is impossible to predict how the Israel-Iran conflict will develop.
Only a list of possible events can be drawn up. Iran pledged to retaliate but is it capable of effectively doing so and if it is, will it also target US bases?
Will regional oil supply and transport routes, namely the Strait of Hormuz, which 20 million bbls of oil sails through a day, be affected? Will the US and Western powers intervene to de-escalate? Will regional Arab powers get involved?
There are many questions without satisfactory answers, therefore it would take a bold man to bet on the reversal of the overnight price jump ahead of the weekend.
Trump: Iran must make a deal
Donald Trump is urging Iran to “make a deal”, warning that further attacks “even more brutal” than last night’s move by Israel have already been planned.
Posting on his Truth Social social network, the US president warns Tehran it must act before it is too late, saying:
I gave Iran chance after chance to make a deal. I told them, in the strongest of words, to “just do it,” but no matter how hard they tried, no matter how close they got, they just couldn’t get it done. I told them it would be much worse than anything they know, anticipated, or were told, that the United States makes the best and most lethal military equipment anywhere in the World, BY FAR, and that Israel has a lot of it, with much more to come – And they know how to use it. Certain Iranian hardliner’s spoke bravely, but they didn’t know what was about to happen. They are all DEAD now, and it will only get worse! There has already been great death and destruction, but there is still time to make this slaughter, with the next already planned attacks being even more brutal, come to an end. Iran must make a deal, before there is nothing left, and save what was once known as the Iranian Empire. No more death, no more destruction, JUST DO IT, BEFORE IT IS TOO LATE. God Bless You All!
US dollar benefit from flight to safety
The rush for safe-haven assets today has pushed up the US dollar, lifting it from Thursday’s three-year low.
The dollar index has gained 0.4% today, as the US currency gained against a basket of currencies. The pound has dropped by over half a cent, to $1.355.
Lee Hardman, senior currency analyst at banking group MUFG, says the Swiss franc, the yen and US dollar have all benefitted from the flight to safety.
Hardman adds:
The developments could provide a timely test of the US dollar’s traditional safe haven appeal after it hit fresh year to date lows yesterday prior to Israel’s military strikes.
On the other hand the flare up in geopolitical tensions in the Middle East and heightened risk of an oil price shock has triggered a reversal lower for high yielding carry currencies such as the Hungarian forint, South African rand and Mexican peso which have benefitted recently from the reduction in financial market volatility.
The more growth sensitive commodity currencies of the Australian and New Zealand dollars have been hit the hardest amongst G10 currencies.
TS Lombard predict oil’s geopolitical risk premium will fade, if crisis is contained
Consultancy firm TS Lombard have predicted that the surge in the oil price will fade, unless the US is dragged into the Israel-Iran conflict.
They told clients this morning:
Although it is too soon to tell if Iran will go further from its drone retaliation, it is clear that the US will not involve itself at this time, unless US assets are targeted. This alienates any “boots on the ground” scenarios which likely makes this recent escalation a transient episode.
We expect the geopolitical risk premium added to Oil today to fade if escalation remains contained.
Marco Rubio, Trump’s secretary of state and national security adviser, has stressed that Israel’s strikes were unilateral, while saying the U.S. had known attacks would occur.
British gas producer Energean has temporarily suspended the production and activities of its power floating production storage and offloading (FPSO) located offshore Northern Israel, following the attack on Iran overnight.
Energean told the City of London this morning that it had received a notice from Israel’s Ministry of Energy and Infrastructure ordering the suspension, “following the recent geopolitical escalation in the region.”
It adds:
The safety of Energean’s staff is our top priority. All production activities have now been temporarily suspended and notices have been issued to Energean’s customers and other stakeholders.
Energean maintains a close dialogue with the Ministry of Energy and Infrastructure and other relevant stakeholders to facilitate the safe resumption of production as soon as possible.
Energean’s shares have dropped by over 6%, the top faller on the FTSE 250 index of medium-sized companies.
A conflict between Israel and Iran could dampen the outlook for the German economy if it leads to an increase in oil prices, the economic institute DIW Berlin has predicted.
DIW chief economist Geraldine Dany-Knedlik says:
“If a noticeable increase in oil prices were to result from this, they would be significant dampening factors that come at an unfavourable time.”
Dany-Knedlik points out that consumer sentiment would be hit by a surge in fuel costs:
“Private households are less influenced by the announcements of the European Central Bank and more by the gasoline and diesel prices they perceive daily.”
The US stock market is set to fall when when trading begins, in a little over five hour’s time.
The futures market indicates the Dow Jones industrial average, and the broader S&P 500 share index, could both drop by 1.2%.
Richard Hunter, head of markets at interactive investor, says:
“Global markets are being rattled by an escalation of Middle East tensions as Israel attacked Iran’s nuclear programme overnight.
The news came after the close on Wall Street on what was otherwise a positive day, but even at this early stage Dow Futures are heading south in response to the attack. There was an inevitable rush to haven assets such as gold following the assault, while the oil price itself gained by more than 7% overnight, all but wiping out its losses for the year.
Of particular concern is the likelihood of retaliatory measures which, if aimed at the Strait of Hormuz where around 20% of global flows are handled, would further potentially constrict supply.
