Middle East Risk Premium Remains Intact... Renewed Escalation Is a Latent Threat to Inflation

In July, the impact of the conflict with Iran on energy prices faded following the peak reached during the initial weeks of escalation. However, the geopolitical risk premium remains present in market pricing, with Brent crude trading near $88 a barrel and West Texas Intermediate around $83 amid signs of stabilization following a sharp rally.

Market attention remains focused on the Strait of Hormuz, through which approximately 20 million barrels per day pass, equivalent to a fifth of global oil consumption. Any new targeting of tankers or infrastructure would be enough to reignite prices, especially after Iraq temporarily suspended operations at its oil ports following the targeting of two tankers in its waters.

Renewed escalation represents the most prominent latent risk to the trajectory of global inflation, as any surge in crude quickly feeds into fuel prices. This could complicate central bank calculations between cutting interest rates and confronting price pressures, after US inflation registered 3.4% in July.

This uncertainty is reflected in safe-haven assets, with gold holding above $4,400 an ounce for a monthly gain of about 10%, while the region's energy-importing economies, chiefly Egypt, remain the most exposed to any fresh wave of higher import costs and weaker shipping and tourism revenues.

What do these terms mean?

Geopolitical risk premium: the extra amount buyers pay out of fear of a possible supply disruption rather than any actual shortage, effectively insurance against a disruption that has not happened yet.

Brent and WTI: Brent is the global benchmark for pricing oil, extracted from the North Sea, while West Texas Intermediate is the US benchmark and usually trades slightly lower.

Strait of Hormuz: a narrow waterway between the Arabian Gulf and the Gulf of Oman through which about a fifth of the world's consumed oil passes each day, so any threat to it is enough to lift prices immediately.

Safe-haven assets: assets investors turn to in times of turmoil to preserve the value of their money, most notably gold.