Skepticism of Iran's Ability to Strike Back at U.S. Causes Oil Prices to Steady

Still, experts think the conflict may still have significant economic impact: File Image/PixaBay

For all of its sabre rattling, Iran cannot retaliate against the U.S. for the killing of military commander Qassem Soleimani without harming its oil exports: that was the contention of some analysts as  crude prices on Monday steadied in the wake of increased hostilities between the two countries.

After breaching the $70 threshold earlier in the session, Brent settled up 31 cents at $68.91 per barrel, while West Texas Intermediate was up 22 cents at $63.27 per barrel.

Bob Yawger, director of futures at Mizuho, explained the growing skepticism of Iran's likelihood of following through on its rhetoric by saying, "There seems to be an emerging dialogue along the lines that it's not in the Iranians' interest to lash out and attack oil infrastructure; because any attack on the oil infrastructure would most likely rally the barrel and that would, in turn, most likely shut down Iranian exports."

But Amy Jaffe, director of a program on energy security and climate change at the Council on Foreign Relations, warned that "I don't think we're out of the woods when it comes to whether this problem could effect oil in a way that would be tangible to oil traders."

Even though Iran's chances of retaliation may be severely curtailed, organizations such as Goldman Sachs on Monday suggested that gold is a stronger hedge than oil for investors seeking safe returns during the escalating geopolitical tensions.

"History shows that under most outcomes gold will likely rally to well beyond current levels," said Jeffrey Currie, global head of commodities research, in a note.

And as was the case during the U.S./China trade war, experts worried that a lasting conflict between the U.S. and Iran would cause "broad economic, financial shock."

Such was the contention of Alexander Perjessy, senior analyst at Moody's, who on Monday cautioned clients that  "A protracted conflict would potentially have global repercussions, in particular through its effect on oil prices."

Perjessy added that the broader economy - including tourism in the Middle East - would also be affected, but that there was also a potential upside in that oil producers in the Middle East could benefit from higher crude prices and "mitigate some of the credit-negative implications," so long as demand remains high and nations are able to continue exporting.

Meanwhile, Brent momentarily topping the $70 mark was said to be putting pressure on emerging market crude consumers such as South Africa, Turkey, and India: Reuters noted that such emerging markets "depend heavily on foreign money flows and have currencies that have struggled in recent months and years."

Bryan Carter, head of emerging market fixed income at BNP Paribas Asset Management, said, "Whenever commodities prices spike, and especially oil prices, the analysis of effects on sovereign balance sheets becomes pertinent again," and he added that much of the impact depended on how long prices remained elevated.