Middle East Crisis Live – Latest Updates
The failure of the United States and Iran to reach a peace agreement after extensive negotiations has raised concerns in markets about further increases in oil and gas prices.
With numerous oil tankers still stranded in the Persian Gulf, the US Vice-President attributed the breakdown of talks to Tehran's refusal to abandon its nuclear weapons program, while Iranian officials criticized Washington's demands as "excessive."
Vance, who departed Islamabad on Sunday morning following 21 hours of discussions with Iranian representatives in the Pakistani capital, stated that his team had clearly outlined its red lines as hopes diminished for a swift resolution to the conflict that began on 28 February with US and Israeli airstrikes on Tehran.
Governments have expressed growing concern about the long-term effects of rising inflation driven by surging oil and gas prices. Central banks have indicated that previous expectations of interest rate cuts will need to be reconsidered. Ireland has experienced social unrest, with protests occurring in Dublin last week and over the weekend regarding the increasing cost of living.
Mohamed El-Erian, an adviser to the German insurer Allianz and former president of Queens’ College, Cambridge, noted that uncertainty will continue to dominate evaluations of the financial consequences of the war.
“While both parties stressed that a quick agreement was too much to hope for given the issues involved, neither readily indicated the next step – something the whole world will be focused on, especially as Israel’s attacks on Lebanon continued throughout the weekend,”
El-Erian added: “Absent a swift resumption of negotiations, the immediate reaction of financial markets when they open for the trading week will be to push oil prices higher and borrowing costs higher.
“The extent of the sell-off in the stock market, where investors have been consistently more optimistic than in other asset classes, will depend on whether they see a viable path to further diplomacy.
“For the UK, all this translates into another hit to the cost of living and less flexibility for both fiscal and monetary policy responses.”
Over the weekend, Israel continued its military operations amid widespread condemnation of its airstrike on Thursday that resulted in hundreds of civilian deaths and numerous injuries.
The week began with threats of severe destruction, including statements that “a whole civilisation will die tonight, never to be brought back again” through bombing of the country’s power stations and bridges. However, these threats were retracted on Wednesday following a hastily brokered two-week truce with Tehran, mediated by Pakistan, which included the reopening of the Strait of Hormuz.
Oil prices experienced significant volatility, dropping below $100 a barrel on Wednesday amid relief over the truce. They closed the week lower, with Brent crude at $94.26 per barrel, compared to a peak of $119.45 during the conflict and approximately $72 per barrel before hostilities began. West Texas Intermediate crude ended the week at $95.63 per barrel.
Global stock markets rebounded after the announcement of the temporary ceasefire. By the end of the week, the S&P 500 index, which tracks leading US companies, was near its level prior to the US-Israeli attacks on Iran and remained flat for the year.
Saudi Arabia sought to prevent a further rise in oil prices by announcing the restoration of its east-west oil pipeline and other facilities following attacks by Iran on Gulf infrastructure.
Citing a statement from the energy ministry, the official Saudi Press Agency reported that the attacks had caused a “loss of approximately 700,000 barrels per day of pumping capacity through the east-west pipeline,” and efforts were underway to restore full production capacity at the kingdom’s Khurais oilfield.
Wei Yao, an economist at Société Générale, commented:
“Even if the ceasefire frays, the more likely near-term outcome, in our view, is messy non-compliance and low-level retaliation near-term, rather than an immediate return to full-blown escalation. For the global economy, this means lasting disruptions, as oil and LNG [liquefied natural gas] flows would normalise only slowly.”
The war’s impact on the global economy will be a central topic at the International Monetary Fund and World Bank meetings starting Monday. IMF Managing Director Kristalina Georgieva has indicated that the fund will present three scenarios this week, all forecasting lower economic growth and higher inflation. The IMF is also expected to emphasize the effects on vulnerable economies.
