Following this morning’s news of an Israeli attack on Iran, oil prices have surged, whilst global markets are slightly down. Morningstar experts have shared with us some of their insights on what this means for equity markets, the oil market, and ESG as follows.
Michael Field, chief equity strategist at Morningstar, commented:
“‘Israel strikes Iranian nuclear facilities’ is always a shocking headline to read, so it’s no surprise the immediate financial market reaction was significant, with oil prices surging by as much as 10% at one point.
Thankfully markets have calmed since, as participants have had time to digest the news fully and assess the real impact of Israeli strikes. Currently, the oil price is up around 6% and equity markets down less than 1%, which gives us a good indication as to what equity markets are thinking. Markets have considered that the pre-emptive strikes by Israel could indeed disrupt oil supply in the region, at a time when markets are in over-supply. Also, the risk of contagion in the region is low, with the market effectively dismissing the possibility of an all-out war in the middle east.
This tallies with the market impact from previous conflicts in the region. Hamas attacks on October 7th 2023, and Iranian strikes on Israel on October last year also had a relatively minimal impact on equity markets.
Despite the material move in the oil price today, the effect on the share prices of European oil stocks has been more muted. BP is up less than 3% this morning, and Shell is up less than 2%. With sentiment negative towards the sector, energy is currently the cheapest sector in Europe. We see material upside for names like BP, ConocoPhillips, and Exxon.”
Allen Good, director of equity research at Morningstar, noted:
“We expect, absent a wider war, today’s rise in prices will likely prove to be a sell-the-news event. Oil markets remain amply supplied with OPEC set on increasing production and demand soft. US production growth has been slowing, but could rebound in the face of sustained higher prices. Meanwhile, a larger war is unlikely. The Trump administration has already stated it remains committed to talks with Iran. We expect a response from Iran, but it will likely be modest, like past retaliatory strikes, and not spark a wider war. Ultimately, fundamentals will dictate price, and they do not suggest much higher prices are necessary. Although the global risk premium could rise, keeping prices moderately higher than where they’ve been much of the year.”
Kenneth Lamont, Principal of Manager Research at Morningstar, noted that this could be “another blow to ESG”:
“A serious military escalation in the Middle East could deal another blow to ESG funds, which have already been battling against poor performance rising anti-ESG sentiment – particularly in the U.S. Traditional sectors often excluded from ESG portfolios, such as defence and fossil fuels, are likely to benefit, widening the performance gap. The recent EMSA ESG naming guidelines, which emphasise climate objectives for sustainable funds and have further curtained fossil fuel exposure, further cementing this divide.”
