Investors Agonize Over Impact Of Direct U.S. Role In War vs. Iran

Investors are mulling a host of different market scenarios should the U.S. deepen its involvement in the Middle East conflict, with the potential for ripple effects if energy prices skyrocket, Saqib Iqbal Ahmed and Lewis Krauskopf reported for Reuters.

Analysts at Oxford Economics modeled three scenarios, ranging from a de-escalation in the conflict, a complete shutdown in Iranian production, and a closure of the Strait of Hormuz, "each with increasingly large impacts on global oil prices."

They have honed in on the evolving situation between Israel and Iran, which have exchanged missile strikes, and are closely monitoring whether the U.S. decides to join Israel in its bombing campaign.

Potential scenarios could send inflation higher, dampening consumer confidence and lessening the chance of near-term interest rate cuts.

This would likely cause an initial sell-off in equities and a possible safe-haven bid for the dollar.

While U.S. crude prices have climbed some 10% over the past week, the S&P 500 has been little changed as of yet, following an initial drop when Israel launched its attacks.

However, if attacks were to take out Iranian oil supply, "that’s when the market is going to sit up and take notice," said Art Hogan, chief market strategist at B. Riley Wealth.

"If you get disruption to supply of oil product on the global marketplace, that is not reflected in today’s WTI price and that is where things get negative," Hogan said.

Analysts at Oxford Economics modeled three scenarios, ranging from a de-escalation in the conflict, a complete shutdown in Iranian production, and a closure of the Strait of Hormuz, "each with increasingly large impacts on global oil prices," the firm said in a note.

In the most severe case, global oil prices jump to around $130 per barrel, driving U.S. inflation near 6% by the end of this year, Oxford said in the note.

"Although the price shock inevitably dampens consumer spending because of the hit to real incomes, the scale of the rise in inflation and concerns about the potential for second-round inflation effects likely ruin any chance of rate cuts in the U.S. this year," Oxford said.