In a report sent to Rigzone on Tuesday by the Macquarie team, Macquarie strategists, including Thierry Wizman, Global FX and Rates Strategist at Macquarie Group, noted that this was a “critical week for oil – and thus for everything else”.
“What happens this week may become critical for the direction of crude oil prices over the medium term,” the strategists said in the report.
“That’s because the key actors in the U.S.-Iran War will be having meetings in New York, starting today [Tuesday]. And the agreements and accords that come out of those meetings may determine whether the war continues and intensifies or whether an off ramp is found,” they added.
In the report, the strategists outlined that they think the discussions can go either way, “including the bad way”.
“One reason is that the Iranian side has gotten much more aggressive in its rhetoric already,” they warned.
“Officials there have warned that any U.S. attack would make American bases and interests across the region targets of ‘continuous, effective, and painful strikes’, and that U.S. naval forces could be again targeted in the Indian Ocean,” they said.
The strategists also highlighted that the U.S. State Department “had warned of ‘unforeseen escalation’ and urged Americans to reconsider travel to the Middle East, with warnings that Iran and groups supporting it may target U.S. interests”.
They also noted that U.S. President Donald Trump “hasn’t made overtures that are peaceful yet, either”.
“Our point is that we’ve seen efforts to foster a diplomatic solution falter many times before, so we wonder why this time should be different,” they stated.
“If it isn’t different, we may see a resumption of an intense kinetic war after the U.S. mid-terms in early November, or before,” they warned.
The strategists went on to state in the report that the direction of crude oil prices still bears on what happens to inflation globally and the decisions taken by central banks in response.
“We have seen every major central bank (including the U.S.’s Fed) cite either energy prices or ‘geopolitics’ as a driver of decision making going forward,” the strategists said.
“It is the key reason behind recent ‘hawkish’ rhetoric,” they added.
In the report, the Macquarie strategists highlighted that Federal Reserve Chair Kevin Warsh cited ‘geopolitics’ in his presser, the BoJ’s Statement cited global inflation risks driven by energy cost spikes, and the BoE warned that persistent global energy market volatility driven by the conflict in Iran could force future Bank Rate hikes.
The strategists also outlined that, “despite the easing of oil prices in the past few days, ECB Chief Economist Philip Lane said that the extended duration of the U.S.-Iran conflict and its offshoots could lead to upward pressure on inflation from a second wave of higher energy prices”.
“Christine Lagarde had already made energy prices a key factor in the policy outlook at her September 10 presser,” they pointed out.
Most Consequential Disruption
A McKinsey report sent to Rigzone late Tuesday, which was penned by several McKinsey representatives, including McKinsey Global Institute Chair and Senior Partner Shubham Singhal, stated that the on and off closure of the Strait of Hormuz is the most consequential in a succession of disruptions reshaping global energy and its flows.
“Over the past decade, markets weathered U.S.-China trade tensions, Covid-19, Russia’s invasion of Ukraine, and increased geopolitical fragmentation,” the McKinsey representatives noted.
“Taken together, they moved energy security – an economy’s ability to access energy to meet its needs within economic constraints, even during disruptions – from the back burner of strategic decision-making to its center,” they added.
While the representative stated that the ongoing Strait of Hormuz disruption is the latest, and largest, energy supply disruption in the report, they warned that it may not be the last.
“Two-thirds of energy trade transits maritime chokepoints, and one-third crosses geopolitical lines,” they highlighted.
“Ninety-five percent of people live in a region dependent on energy imports,” they pointed out.
The strategists went on to note in the report that the energy system has so far proven more resilient than expected.
“This is due mostly to temporary buffers and bypass pipelines for oil,” they said.
“Trade has rewired globally as China curtailed imports and the United States released inventories. The global economy has in many ways accommodated a drop in oil consumption – but unevenly, and the refining system is especially stressed,” they added.
According to the representatives, “as the clock ticks, regions are pulling structural energy security levers”. They highlighted that these range from electrification to coal, from rewiring trade to inventories and demand management.
“By 2030, responses underway or under discussion could offset 35 to 70 percent of the Strait’s precrisis oil flows in the event of a future shock,” they revealed.
“But implementation is uncertain and comes at a price. New pipelines are the cheapest option, yet they divert rather than displace Gulf oil and are vulnerable to broader regional disruptions,” they highlighted.
The McKinsey representatives said in the report that, “with energy security, there are no easy exits but room to maneuver”.
“Replacing imports with mature clean technologies could, in theory, displace up to nearly one-third of oil and gas use. But it can be slow and expensive, and it hits hard ceilings,” they warned.
“As a result, a combination of new sources of supply, infrastructure to rewire trade, and inventories plays an important role,” they added.
The representatives also noted that energy security concerns are reshaping the business case for resilience.
“While measures require investment, they also can cut costs over time, enable business continuity, and drive growth,” they noted.
“Decision makers should map their exposure across fuels, assets, and routes – and act on it, from improving energy efficiency to building flexibility in inputs, suppliers, and logistics,” they added.
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