Our Opinion: 2024
More oil on troubled waters
With approaching US elections, a change of government in the UK and new parliament in France, the crisis in the Middle East has fallen off many of the news pages. It shouldn’t. Over and above the tragic ongoing human suffering, the global economy is still very vulnerable to the machinations of Middle East politics.
It’s been ten months since Hamas-led militant groups launched a surprise attack on Gaza which led to the fifth war of the Gaza-Israel conflict since 2008.
The war has been one of the deadliest and most significant military engagements in the region in recent years, and the devastating humanitarian impact has prompted outcry from supporters of both sides around the world.
The conflict stopped economic growth in the area in its tracks, and has triggered tensions and hostilities across the Middle East, as well as impacting the economic landscape further afield.
Traffic through the Suez Canal, which provides a significant source of revenue for Egypt has plummeted by more than 40% in the last two months due to attacks on commercial and military vessels by Iran-aligned Houthis, according to the UN.
In order to avoid these attacks hundreds of commercial vessels are being rerouted to sail around the Cape of Good Hope, a route which has seen a significant increase in December 2023, but is obviously a longer a more costly option.
As a result of the ongoing Red Sea crisis tanker traffic passing through the area has dropped by 18%, the transit of cargo shops carrying grain and coal is down 6% and gas transport is at a standstill. Since the start of the war, the IMF calculates that the cost of transporting a container from China to the Mediterranean Sea has quadrupled, and has voiced concerns that this disruption to trade could have a long-lasting impact on the region.
However, oil prices have been steadily coming down and fell by 2% on Tuesday, to a six week low, raising expectations of a ceasefire in Gaza. Brent futures fell $1.39, or 1.7%, to settle at $81.01 a barrel, while U.S. West Texas Intermediate crude (WTI) closed $1.44, or 1.8%, lower at $76.96. U.S. diesel futures also settled at their lowest since June 7, while gasoline futures closed at their lowest since June 14. The European Central Bank has hinted at a possible interest rate cut in September and in the US, investors are also betting that the Federal Reserve will do the same. China recently surprised markets by cutting short and long term interest rates signalling its intent to boost growth to its economy.
Elsewhere, Turkey has suspended all trade with Israel over its war with Gaza. The Turkish trade ministry has said that the measures will be in place until Israel allowed “uninterrupted and sufficient flow” of aid into Gaza. Trade between the two countries was worth almost £5.6bn last year.
Efforts to reach a ceasefire deal between Israel and militant group Hamas have gained momentum in the past month, and according to senior US officials could now be in the closing stages. Israeli Prime Minister Benjamin Netanyahu is currently in the US and has met with US President Joe Biden to discuss how to overcome the remaining obstacles and reach a deal that will see the release of the remaining hostages.
Investors would be entitled to feel things could have gone far worse. But they are certainly not as good they might have hoped either. The prognosis for a quick resolution is that one is far from near. With an end no-one in sight imminently, a watching brief is in order.
27th July 2024
