Financial markets facing ‘major wobble’ after US attack on Iran, with oil prices and volatility tipped to climb

As the world holds its breath after the US attack on Iran, investors and analysts are predicting higher oil prices and a major market wobble that will end 2024-25 on a dark note.

A surge in oil prices and a major “market wobble” will set the scene when global markets reopen on Monday, with the escalating war in the Middle East destined to wipe out all of this year’s Wall Street gains and ramp up the fear index.

Analysts were contemplating a range of market scenarios, all of them bad, in response to the deepening crisis, with higher oil prices and increased volatility the most assured outcomes. It also means Bain Capital’s $2.3bn Virgin Australia initial public offering slated for Tuesday encounters a more bearish reception than its private equity owner could have conceived when fund managers were clamouring for position.

The price of oil could ultimately spike to $US100 a barrel, from the previous close of $US77 a barrel, MST Marquee analyst Saul Kavonic predicted.

The international Brent crude benchmark was already up 18 per cent since Israel first launched its volley of strikes at Iran on June 12, and Mr Kavonic said further intensification seemed likely.

“Much depends on how Iran responds in the coming hours and days but this could set us on a path toward $US100 oil if Iran responds as they have previously threatened to,” the energy analyst said.

The Strait of Hormuz is viewed as vulnerable to any retaliatory attacks, hobbling a major shipping route for both crude and Qatar’s LNG.

But Wall Street’s fear gauge, the Cboe Vix Index, is tracking 69 per cent below this year’s tariff war peak, despite the instincts of the bond market that darker times lie ahead.

GSFM Funds Management investment adviser Steve Miller remarked that up until now, markets had been relatively complacent in response to the Israel-Iran war.

“I think the natural reaction will be a sustained elevation of oil prices, which makes the inflation containment task facing central banks much harder,” Mr Miller said.

“You would naturally expect in moments like these that risk markets would wobble and maybe wobble substantially and I’m surprised they haven’t wobbled more.

“I would expect there would be a downdraught in terms of risk assumption by markets and that would mean potentially a significant equity sell-off.”

He speculated it was possible the US attack had the blessing of the Arab states, which could help mitigate any negative reaction.

Mr Kavonic said oil may be poised to rally irrespective of the how the geopolitical cards are dealt.

“The US is now positioned with an overwhelming defence posture in the region to be prepared for any Iran counter attacks. But the risk for oil prices is the situation could escalate severely further before de-escalating again.”

US President Donald Trump described the bombings of Iranian nuclear sites as ‘a very successful attack’. Picture: AFP

All eyes are on Iran in the interim, independent economist Saul Eslake said.

“The first scenario is Iran basically backs down from any attempt to proceed further with uranium enrichment and the development of nuclear weapons, and just kind of accept their fate in which the whole thing could dial down and the oil price will go back to $US60 a barrel,” Mr Eslake said.

“That would be the most benign possible outcome and it’s not impossible.”

If Iran sought to retaliate by knocking out some of Saudi Arabia’s and other Gulf States’ oil production facilities, the oil price could “very easily get up to over $US100 a barrel” he agreed.

“It did get to $US130 a barrel before the financial crisis 16 years ago, so you potentially could go there, and then the consequences of that are all very negative for financial markets,” Mr Eslake said.

K2 Asset Management chief investment officer George Boubouras was measured in his assessment, pointing out that Saudi Arabia had supplied a lot of oil prior to the conflict which was acting as a cushion to support global growth.

He said that was why oil had not spiked as much as feared when Israel first attacked Iran.

“In the short term there will be nervousness with financial markets however it’s always important to understand that we in the markets will be alert but we’re not alarmed,” Mr Boubouras said.

“When we take a step back economic conditions in the US and economic conditions in trade globally won’t be overtly impacted from it, but in the short term there will be nervousness and uncertainty. We just have to work through it.”

K2 Asset Management’s George Boubouras.

Meanwhile, any jump in the oil price was not expected to affect the financial terms of Abu Dhabi’s $30bn takeover for Santos, which has been endorsed by the board pending the outcome of due diligence.

The XRG-led consortium has offered $8.89 cash per Santos share, and sources said a spike in crude would not lead to any adjusted bid by the Middle East group.

Santos shareholders may clamour for a better offer, however, if a protracted war in the region pushes prices closer to the $US100 a barrel level.

Mr Kavonic said the higher oil prices go, the smaller the implied takeover premium which could see investors reconsider the merits of the deal.

“If we stay in a $US60-90 a barrel range then the deal terms may be safe. But if oil went above $US100 for a decent length of time, the temporary cash windfall for Santos could see the calculus for Santos investors change,” Mr Kavonic said.

Originally published as Financial markets facing ‘major wobble’ after US attack on Iran, with oil prices and volatility tipped to climb