Many investors are holding their breath after Iran’s unprecedented drone and missile attack against Israel on April 13. It was the first direct attack launched from Iranian soil against Israel and came on the same day that Iran’s Revolutionary Guards forcibly seized a container ship of Israeli interests near the Strait of Hormuz.

The Iranian attack was widely expected after Israel destroyed part of the Iranian embassy compound in Damascus, Syria, on April 1.

But experts are waiting to see if the conflict between the two countries escalates, even as the United Nations and the United States put pressure on Israel to show restraint. Most businesses don’t like uncertainty, and the possibility of a wider open war keeps the region on alert.

Oil and energy prices in the Middle East

If the conflict escalates and engulfs more of the Middle East, the biggest risk to the global economy is the response to energy markets, especially in oil prices.

“A rise in the price of oil would complicate efforts to bring inflation back to the targets set by advanced economies, but would have a meaningful impact on central bank decisions (on the path of interest rates) only if higher energy prices trigger an increase of structural inflation,” wrote Neil Shearing, chief economist at Capital Economics, in a note to investors.

So far, although oil prices haven’t moved much since the attack, it seems the market had already taken note of the current volatile situation and was undeterred over the weekend by Iranian retaliation.

OPEC+ and its excess capacity

In fact, Brent crude oil prices rose from $83 a barrel a month ago to over $90 last week. That’s where the price of crude oil held, “partly driven by supply concerns and geopolitical risks from conflicts in the Middle East and Ukraine,” Shearing wrote.

The economist pointed out that another reason for calm in the oil market is the tendency of some OPEC+ members to increase production quotas. “An increase in the supply of oil obviously helps limit any increase in its price” that would otherwise occur, whether due to heightened tensions or supply chain problems, such as the perilous shipping routes in the Red Sea.

Jorge Leon, vice president of Rystad Energy, agrees. Although OPEC+ has a complicated job of coordinating and managing the oil market, it is likely to ease production cuts at a meeting in June, he wrote on Monday. This could release six million barrels per day and limit inflationary pressures on prices, as it is in the group’s interest to avoid a global energy crisis.

Inflation can affect growth

If oil prices rose and remained high, this could fuel global inflation, at a time when many countries are already suffering from long-term high inflation.

This is “something that could create a dilemma for central banks, as we also saw after Russia’s invasion of Ukraine in 2022,” Deutsche Bank analysts said in a note to clients. “There is a risk that a geopolitical shock could damage growth, upsetting the timetable for rate cuts,” according to the German bank.

Invest in everything that shines

In terms of stocks, when markets opened on Monday many Asian indices such as the Nikkei recorded a decline, while European markets opened higher. Overall, analysts don’t see much change among key assets since Friday, “with investors hoping any escalation will prove limited.”

A small sign of investors looking for a safer investment was the rise in the price of gold. On Monday, it rose 0.51%, reaching just above 2,356 dollars (2,211 euros) an ounce.

It is still early days and the conflict could spread to other countries, lead to more US sanctions on Iran or destroy the country’s oil infrastructure. Some Western airlines have temporarily suspended flights to the region, others have changed routes to avoid Middle Eastern airspace.

If Iran or the pro-Iranian Houthi rebels continue to target Israeli-bound ships in the important Strait of Hormuz trade route, “there is a risk of mistargeting and collateral damage”, according to Ambrey, a marine risk management company. This risk could further embroil the US, drive up freight costs globally and eventually wreak havoc on the global economy.