INSUBCONTINENT EXCLUSIVE:
By DK AggarwalHeightened geopolitical tension in West Asia returned to haunt markets this week, after Iranian armed forces shot down an
Hormuz, which raised concerns about possible disruptions in oil supplies.
This kind of tension between Iran and the US is not new
In 1988, the US had launched a significant military operation against Iran, code-named Operation Praying Mantis, and swiftly destroyed
multiple Iranian oil platforms, sea bases and ships, sending crude oil prices soaring
spilled over to the sea and disrupted oil tanker movement
Incidentally, crude oil remained a bone of contention between the two countries for decades.
To boot, Iran and the US have had no formal
diplomatic relations since 1980
Last year, the US shredded the 2015 nuclear agreement with Iran, reimposed sanctions and ended waivers on Iranian crude imports
The shooting down of US military drone by Iran marks the latest escalation in tensions between the two nations.
There is fear among market
participants that the tension could escalate, as there are no signs of the two nations coming together for talks anytime soon
moment.
The US says it would take every action necessary, including diplomatic, to guarantee safe navigation in West Asia
The US itself is no longer dependent on the oil flow from the Gulf
But the escalation of tension may interrupt shipping through the Strait of Hormuz (the Strait), a key route of the global oil market, and
significantly affect global oil prices.
Though most of the oil that flows through the Strait comes to Asia Pacific, Europe and North
America, the oil market is globally integrated and a disruption anywhere can contribute to higher oil prices everywhere.
Crude oil prices
have already started a northward journey after remaining calm for the past few years on demand improvement in the US and as Opec and other
producers agreed on a date to discuss output cuts
A US-China meeting at G-20 to ease trade tension, which was threatening global growth, is another positive for crude oil.
If the tension in
West Asia does not ease quickly, it may become a cause for inflation to accelerate, posing a challenge for the economies dependant on oil
imports.
Monetary policymakers the world over are taking note of the latest spike in crude oil prices
The challenges to global growth have already made central bankers across Asia, Europe and North America to turn dovish in their outlook
Going ahead, we may see a further extension of easy money policies to spur growth
In such a scenario, we may see easy liquidity return to financial markets, especially developing economies such as India, leading to a spike
in asset prices.
Chairman and MD, SMC Investments and Advisors
