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APAC region on alert as Middle East tensions threaten oil prices

Oil Barrels

Escalating tensions in the Middle East pose a significant threat to Asia-Pacific economies with oil prices set to increase, according to a new report from Moody’s Analytics.

Prior to Iran’s missile and drone attack on Israel – which occurred on 13th April in response to an airstrike in Syria that killed an important Iranian general – West Texas Intermediate crude was trading between $85 and $90 per barrel, says the top-tier analysis group.

Of that, an estimated $5 was a risk premium in anticipation of the attack. Now that the attack has actually taken place, oil prices are expected to add another $5 per barrel to the risk premium, which will place them within the $90 to $95 per barrel range.

In the report, Moody’s Analytics outlines two possible scenarios following Iran’s attack and what this could mean for oil prices.

The most likely scenario, it says, is a measured and restrained response from Israel that de-escalates tensions, which is in line with pressure from the Biden administration in the US and the wider global community. 

The result of this would see the increased $10 per barrel risk premium fade over the next few weeks. 

However, the second scenario is far more concerning and a lot more damaging, leading to an escalation in the conflict as Israel responds to the attack with force. This could see oil prices quickly jump to more than $100 per barrel.

Since Moody’s Analytics released their report, the media reported on an Israeli retaliatory strike on Iran during the early hours of 19th April. However, Tehran has played down the incident and says it has no plans for retaliation, according to Reuters.

When it comes to impacts across APAC countries, these vary but there are three main challenges the region broadly faces.

Higher oil prices threaten to derail the region’s already choppy progress on inflation, according to the report. 

“First, they add to inflation through higher energy and fuel costs. Second, they add to the cost of production and overall transport costs, lifting prices on everything from food to thongs. The risk of higher food costs, via higher fertiliser, transport and seed costs, is especially worrisome because in much of Asia, it is stubbornly high food price inflation that keeps top-line consumer price indexes from retreating to central bank target ranges,” it says. 

“Third, higher oil prices can push up inflation expectations, making the job of central banks even harder”.

Concluding the report, the authors explain that if the widening conflict is not defused soon, the ripple effects will be felt in the Asia-Pacific region and around the world.

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