The Impact of International Oil Price Fluctuations

The ongoing conflict between the US, Israel, and Iran for over ten days has caused international oil prices to go on a roller coaster ride. From approaching $120 per barrel on March 9, a new high since June 2022, to falling below $100 per barrel the next day after Trump’s statement that the conflict would end “very soon”… Oil prices fluctuated sharply, forcing global asset re-pricing. In the early trading hours of March 16, spot gold prices experienced a rapid decline followed by a rebound. As of 11 a.m., spot gold prices had returned to the $5,000 mark.

“From March 9 to March 15, the gold market showed a typical ‘geopolitical safe-haven’ versus ‘interest rate expectation suppression’ dual-game pattern,” noted Zhou Junzhi, Chief Macro Analyst at CITIC Securities. Despite tense Middle East tensions, gold’s safe-haven attribute was temporarily suppressed by interest rate logic. Copper prices were affected by dual factors. On one hand, rising global energy prices increased production costs, supporting copper prices; on the other hand, a strong dollar and concerns over global economic growth suppressed copper prices. “Market funds are shifting from safe-haven assets to energy and commodities supported by costs. Oil-related products have become hot spots for capital chasing, while traditional safe-haven assets like gold face outflows,” she said.

Regarding the future price trends of precious metals like gold, silver, and copper, Zhang Xuezhi, Professor at Sun Yat-sen University’s School of International Finance, told China Youth Daily that in the short term, gold, silver, and copper are still influenced by interest rates and the strength of the dollar. In the medium term, factors such as interest rate cut cycles, supply and demand fluctuations, and geopolitical developments may cause divergence in their trends due to differences in supply elasticity.

He also mentioned that large amounts of capital previously went long and chased prices, then panic liquidated, and that the long and short mechanisms in the crude oil futures market have undoubtedly amplified price volatility.

Zhao Xijun, Professor at Renmin University of China and Co-Director of the China Capital Market Research Institute, believes that the cost pressures from rising oil prices have not yet transmitted to the real economy. The immediate impact remains concentrated on psychological expectations and market sentiment. “Moreover, countries, especially those heavily importing crude oil, hold reserves of a certain scale of oil, so short-term fluctuations are unlikely to cause significant supply gaps.”

However, he also pointed out that crude oil is a vital part of the global energy market and a source of raw materials for many basic chemicals. Fluctuations in oil prices often propagate along the industrial chain, impacting the global economy. “The Strait of Hormuz, the only waterway in and out of the Persian Gulf, handles about 20% of global oil transportation and has been blocked, which impacts the global energy market.”

Zhang Xuezhi believes that US retail fuel prices are highly correlated with international oil prices. Price fluctuations will influence inflation through cost transmission, but the impact is temporary. “If oil prices remain at current levels or continue to fall, this impact will mainly be felt in March and April.”

The rise in energy prices caused by the US-Israel-Iran conflict is also reshaping inflation expectations and the monetary policy paths of various countries. Data from the Chicago Mercantile Exchange’s “FedWatch Tool” shows that the market currently expects the Federal Reserve to cut interest rates only once this year. Meanwhile, the implied probability of rate hikes by the Reserve Bank of Australia, the European Central Bank, and the Bank of England is also increasing.

“Demand growth in the market remains weak, and inflation in major countries, including the US, is still gradually declining,” Zhang Xuezhi said. He views the oil price shock as a temporary exogenous disturbance that will not change the overall inflation trend. Therefore, central banks may delay rate cuts and do not yet expect rate hikes.

Zhao Xijun also believes that, in most cases, a country’s monetary policy adjustments mainly depend on deviations of macroeconomic indicators such as domestic prices, employment, and economic growth from target levels. “Whether many central banks will raise interest rates depends on how long the conflict between the US, Israel, and Iran persists.”

So, what are the impacts of rising oil prices on domestic production and consumption? Luo Zhiheng, Chief Economist and Director of the Research Institute at Yuekai Securities, states that the most direct effect of rising oil prices is on the Producer Price Index (PPI). It mainly occurs through four channels: directly increasing the ex-factory prices of oil extraction and processing industries, vertical transmission along the industrial chain, raising prices of coal and other energy substitutes, and systematically increasing logistics and transportation costs.

He mentioned, “Fuel is a core cost component of logistics. Rising oil prices will systematically increase costs for road transportation, shipping, and other logistics, and since almost all industrial products involve transportation, the rise in transportation costs will have a broad, widespread effect.”

Regarding the transmission of oil price increases to the Consumer Price Index (CPI), Luo Zhiheng believes the process is more complex and longer. Besides directly raising retail prices of gasoline and diesel through fuel price linkage mechanisms, which also increases costs for taxis, ride-hailing, courier services, and airlines, the upstream price increases in PPI will also pass through to downstream consumer goods like plastics, textiles, and home appliances. Additionally, it will indirectly influence food prices through higher costs of fertilizers, pesticides, agricultural machinery fuel, transportation, and packaging materials.

Many experts agree that the impact of the US-Iran conflict will extend beyond energy inflation, including supply chain restructuring, raising the interest rate center, and even reshaping the global monetary system.

A manager from a new materials company in Dongguan, Guangdong, recently told media that upstream material prices have increased by nearly 60%. When reaching the midstream company, costs have actually risen by 50-60%. The company responded by adding new high-torque twin-screw production lines to reduce costs and increase efficiency.

(Intern Ruan Yuntian also contributed to this article)

Source: China Youth Daily Client