Concerns over the potential escalation of conflict in the Middle East have led investors to seek refuge in oil, gold, and bonds, while avoiding the Australian dollar, which almost touched a one-year low.
Israeli Prime Minister Benjamin Netanyahu's stern warning to Hamas and US President Joe Biden's intervention in the Gaza conflict have heightened concerns over a possible wider Middle East confrontation.
These geopolitical strains have led investors to prioritise safe-haven assets like gold and bonds over riskier investments, pulling the Australian dollar to US63.21¢ on Monday, just shy of its one-year low at US62.83¢.
The Brent oil benchmark saw a modest decline of 0.3% to US$90.63 a barrel on Monday, following a nearly 6% gain last week. Analysts suggest that an Israeli ground invasion of Gaza could send crude prices soaring to US$100 a barrel, further challenging the global economy. Vivek Dhar, a mining and energy commodities analyst at Commonwealth Bank, noted the high-risk scenario of direct engagement between Israel and Iran impacting the Strait of Hormuz, responsible for up to 20% of global oil transit.
This is why Iran potentialy becoming directly involved in this latest war in the Middle East would put a rocket up the oil price. pic.twitter.com/WdIkUu4lMS— maneco64 (@maneco1964) October 7, 2023
The Organisation of the Petroleum Exporting Countries (OPEC+) had already sounded the alarm about steep production cuts this quarter. Daniel Hynes, a senior commodity strategist at ANZ, stated, "We believe the oil price warrants a risk premium of US$5 to US$10 per barrel due to the supply risk, and maintain our short-term price target of US$100."
In Australia, the surge in oil prices has lifted petrol costs above A$2 per litre, stoking underlying inflation concerns. The Reserve Bank of Australia (RBA) reported a 5.9% annual core inflation in the second quarter, significantly surpassing its target range of 2% to 3%.
The ongoing geopolitical turmoil and its repercussions have market watchers globally on edge, further complicating the investment climate.