The commodities feed: Oil on edge

Energy markets continue to monitor escalating Israel-Iran conflict, focusing on any signs that Iran may seek to disrupt crude flows across the Strait of Hormuz.

Energy – Oil near five-month high

The oil market remains on edge with the conflict between Israel and Iran entering its sixth day. Prices have rallied around 10% since Israel started its attack on Iran last week and are now close to a five-month high after US President Trump met with his national security team on Tuesday to discuss the escalating conflict, sparking speculation that the US could be preparing to join the attack.

The biggest fear for the oil market is the shutdown of the Strait of Hormuz. This could impact oil flows from the Persian Gulf. Almost a third of global seaborne oil trade moves through this chokepoint. A significant disruption to these flows would be enough to push prices to $120/bbl. OPEC’s spare capacity would not help the market in this case, as most of it is located in the Persian Gulf. Under this scenario, we would need to see governments tap into their strategic petroleum reserves, although this would only be a temporary fix.

This scenario also has ramifications for the European gas market.

On Tuesday, Qatar asked LNG vessels to wait outside the Strait until they were ready to load amid the escalating tensions. Qatar is the third-largest exporter of LNG, making up around 20% of global trade. And all this supply must move through the Strait. The global LNG market is balanced now, but any disruptions would push it into deficit and increase competition between Asian and European buyers.

Metals – Iron ore sinks

Iron ore prices sank below $93/t as demand continues to slow down in China. Demand from China is likely to remain weak amid the continued slowdown in China’s property market. Iron ore is among the most vulnerable to China's slowdown risks, as the country's property market constitutes the bulk of steel demand.

Data from China this week revealed that new-home prices have experienced their steepest decline in seven months. China’s property market saw a 0.2% decline in new home prices in 70 cities in April. China’s new home starts – the biggest steel demand driver – have also continued to fall. This should suppress steel demand in the months ahead. The country's recent stimulus policies have focused on clearing property inventories rather than boosting new starts, which will limit the impact on steel demand as it requires new construction rather than clearing unsold stock.

This week, data from China showed nationwide steel output in May was below April’s daily total and almost 7% lower than a year ago as authorities in China push mills to curb steel output to combat a glut.

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