War in the Gulf Upends Global Commodities
Five weeks into the US-Iran war, global commodities markets are fracturing under the strain.
Physical supply shocks and blockaded shipping routes have sent prices soaring, while fears that skyrocketing energy costs will spark a global recession are driving a historic sell-off in various precious metals.
As trading floors close ahead of Good Friday, investors are bracing for an extended conflict with no clear diplomatic resolution.
Oil sees no quick relief
The anchor of the current market volatility is oil. Prices have skyrocketed since the US and Israel launched strikes on Iran on February 28, leading to retaliatory strikes and the effective closure of the Strait of Hormuz–a maritime chokepoint that normally handles more than 20 percent of the world’s oil supply.
In volatile trading this week, US crude oil jumped 10 percent to breach US$110 per barrel. Brent, the international benchmark, rose 6 percent to trade above US$108.
The disruption pushed Brent crude up more than 60 percent in March alone, marking its biggest monthly price gain since records began in the 1980s.
The most recent surge follows a Wednesday (April 1) address by US President Donald Trump. While he paused attacks on Iranian energy facilities until April 6, he pledged further “extremely hard” strikes in the coming weeks and offered no structured path to a ceasefire.
Regarding the critical shipping lane, Trump merely stated, “The strait will open up naturally.”
The lack of a diplomatic resolution has forced markets to price in an extended conflict.
“The Gulf conflict looks set to extend well beyond three weeks. Even if the United States withdraws, Iran can continue the fight,” Simon Evenett, Professor of Geopolitics and Strategy at Switzerland’s IMD Business School, told CNBC in an email.
“Claims that Tehran’s capabilities have been obliterated are overstated. Iran can sustain a stranglehold on the Strait of Hormuz. Oil prices would rise sharply. Physical shortages will emerge. Demand destruction becomes a necessity.”
That demand destruction may arrive sooner rather than later. In the US, the national average for unleaded gas has hit US$4.08 a gallon, up from US$2.98 before the conflict. Diesel sits at US$5.51. In Europe, eurozone inflation surged to 2.5 percent in March.
Aluminum takes a direct hit
Benchmark three-month aluminum on the London Metal Exchange (LME) rose 5.9 percent to US$3,492 a ton at the start of this week, pushing toward a four-year peak.
The rally was sparked by Iranian missile and drone strikes over the weekend targeting two major smelters: Emirates Global Aluminium (EGA) in the UAE and Aluminium Bahrain (Alba).
The Middle East produces about 9 percent of global aluminum supply. EGA and Alba are among the world’s largest single-site smelters, each producing roughly 1.6 million tons last year.
The attacks caused a loss of power…
Read More: War in the Gulf Upends Global Commodities