Middle East tensions threaten global economy

CNN reported yesterday that oil prices continued to rise due to concerns about escalating conflicts in the Middle East. Brent crude oil prices were trading at $74.8/barrel, up nearly 2% while WTI oil increased 2% to $71.2/barrel.

Both benchmarks ended the session up about 2.5% in the U.S. after rising as much as 5% at one point. Stephen Innes, an analyst at SPI Asset Management in Switzerland, said rising tensions in the region had dampened the optimism that had fueled financial markets over the past week, and the real concern was a possible Israeli attack on the oil industry of Iran, a major exporter in the Organization of the Petroleum Exporting Countries (OPEC). Iran exports about 1.7 million barrels of oil a day, most of it to China, but analysts said any cut in production could have a major impact on global markets.

According to the Financial Times, traders and analysts warn of the risk of disruption to energy exports if the conflict in the Middle East spreads, because the region accounts for about a third of global oil production. In addition to being a major exporter, Iran also has a position that blocks the Strait of Hormuz, a bottleneck through which oil and gas exports from Gulf countries such as Saudi Arabia, Qatar, Kuwait and the UAE pass. "So when Iran gets involved in a war with its neighbors, you have some risk of geopolitical disruption," said Bob McNally, founder of the Rapidan Energy Group and a former adviser to former US President George W. Bush.

The turmoil in the Middle East has also affected other stock and commodity markets around the world. With the exception of Hong Kong's Hang Seng Index, which rose thanks to China's stimulus policies, most Asian stock markets were in the red on October 2, following the sell-off on Wall Street, according to CNN.

Defense stocks rose across the board as the risk of conflict escalated. According to CNBC, shares of European defense contractors Saab and BAE Systems rose 2.2% yesterday, while Thales and Rheinmetall rose more than 1.3%. Previously, shares of American contractors Lockheed Martin, RTX (formerly Raytheon), Northrop Grumman and L3Harris all rose more than 2.6% on October 1. Of which, shares of Lockheed Martin and RTX hit record highs while the other two companies reached their highest levels since 2022, according to Forbes.

Safe-haven assets also rose, with the dollar trading at a three-week high against the euro.