Implications from growing tensions in the Middle East
Tensions in the Middle East are growing, first with the attack on the U.S. embassy by pro-Iranian protesters, and then with the death of an Iranian commander, Qassem Soleimani, in an airstrike by the U.S. near Baghdad International Airport.
How does this impact the economic outlook?According to Jean-Michel Saliba, Strategist for BofA Global Research, the Middle East may see a volatile period ahead depending on the nature of the Iranian response. That could include escalation in Iraq or other parts of the Middle East, attacks on important infrastructures, target action against Americans or escalation of the nuclear program. At minimum, higher risk premiums on oil and Middle East assets are expected.
The main impact on the U.S. and the global economy would come from sustained oil price increases, but research shows that oil price changes tend to have small impacts on the economy unless prices rise significantly.
Nicholas Colas of DataTrek indicates that it is the rate of change in the price of oil that matters most. When the price of West Texas Intermediate crude increases by more than 90% in a year, the U.S. is either about to enter a recession or is already in one. That makes $95 per barrel the tipping point for the U.S. economy, 90% higher than the $50 per barrel lows of 2019.
Colas explains that, with U.S. oil production still climbing, it would take a full-blown military conflict in the Middle East to see crude prices hit such levels. The latest data from the U.S. Energy Information Administration shows November 2019 U.S. production at 12.8 million barrels per day, an all-time record.
Thus, the current price level of oil is far from creating recessionary pressures in the U.S.
CNBC Analysis indicates that oil prices tend to see sustained gains following Middle East crisis events, and stocks then follow the move higher. After 20 crisis events in the Middle East over the last three decades, including the attacks on oil facilities in Saudi Arabia last September, analysis found that crude prices see a positive change more than 80% of the time in the wake of major events. Gold and stocks then track as the next most successful asset classes, while safe-haven assets including Treasurys and the dollar tend to fade after initially moving higher.
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