Susannah Streeter, chief investment strategist, Wealth Club: “As the Iran crisis continues seemingly without end, with negotiations stuck at a stalemate, oil prices have ratcheted higher. Brent crude has been trading above $110 a barrel as warnings of an unprecedented energy shock hit home. With the ceasefire largely holding, there seems to be an absence of urgency in reaching an agreement. The sticking points appear to be whether Iran’s concessions over ceasing its nuclear programme go far enough for the US, while from Tehran’s side it wants the US naval blockade lifted and a new plan for transit through the Strait of Hormuz. Every day this crucial waterway remains closed, the higher the costs that filter through supply chains causing fresh financial pain for companies and consumers.
As crude prices ramp up in the void of hope about a deal being reached anytime soon, it’s sent fresh worries cascading through equity markets. Indices in Asia closed in the red, as nations highly dependent on energy imports count the cost. London’s FTSE 100 has opened flat in early trade, with a fresh climb in the share prices of energy giants helping to offset the wary mood.
While big winners from the energy crunch have clearly been the oil and gas giants. BP has cleaned up with its results exceeding forecasts, but there’s complexity to navigate ahead. Profits for the first quarter of the year have boomed, more than doubling, as crude prices soared in March. Its trading division saw ‘exceptional’ profits which boosted overall earnings to $3.2 billion for the quarter, up from $1.38 the same time last year. The division has clearly thrived in an environment of wild swings, leading to high velocity trading. With profits coming in higher than expected alongside the fresh ramp-up in crude prices today, it’s put fresh wind in the sails of the share price, which is up around 22% since the conflict began.
But BP is not immune to the damage and destruction wreaked on facilities across the Gulf, even with the oil prices back at scorching levels. The second quarter is set to be weaker due to the disruption. The Rumaila oil field in Southern Iraq which it operates as part of a partnership was first closed as a precaution and then struck by drones. Then there’s the overall disruption expected as cargoes mount up and the Strait of Hormuz remains closed. So, while volatile energy prices are set to continue to benefit the trading division, there’s going to be a tale of repair and maintenance costs to bear going forward. There’s also still the huge uncertainty surrounding future transit through the Strait of Hormuz, with potential tolls still on the table, that’s once the tankers are able to navigate mines planted in the waterway.
Central bankers are keeping a close eye on volatile prices and the impact on economies. The Bank of Japan is in tune with the mood music expected from other central banks this week and has kept interest rates on hold. As policymakers assess the heat seeping into the economy through higher energy costs, and the counteracting force of potential depressed demand as consumers and companies batten down the hatches, it’s still a wait-and-see game right now.”
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