Rising fears of an escalation of the Middle East conflict, coupled with China's latest round of stimulus to prop up the economy could provide oil an opportunity to recover some of its lost ground during the rest of the year but concerns around the US economy may present some headwinds, according to one of the world's leading commodity investors, Jim Rogers.
Rogers, chairman of Beeland Interests, Inc. and co-founder of the Quantum Fund with George Soros, told S&P Global Commodity Insights that there is growing evidence indicating the Israel-Iran conflict would worsen before it improves. He highlighted the likelihood of prolonged sanctions on Iran, potential damage to regional oil infrastructure, and escalating risks of disrupted oil flows.
"Oil in the $70s per barrel is much lower than some of the highs we have seen in recent years. With so much of oil flows and oil infrastructure in the Middle East at stake, the market will continue to draw some strength, given the potential risks to flows and infrastructure," Rogers said.
Iran has one of the largest refining sectors in the Middle East, with about 2.4 million b/d of capacity in 2023 spread across 10 main sites. Its three biggest refineries are the 370,000 b/d Isfahan plant, the 360,000 b/d Abadan refinery, and the 320,000 b/d Bandar Abbas site.
Risk to flows, infrastructure
"I can see sanctions on Iran only increasing and oil flows from there remaining increasingly restricted. Sanctions are certainly not going away anytime soon. I am afraid that the problems are going to get worse before they can get any better," Rogers added.
US President Joe Biden on Oct. 2 spoke with G7 leaders to coordinate new sanctions and other measures in response to Iran's recent attack on Israel, while the US Treasury Department issued a new round of sanctions on the Iran-backed Houthi rebels in Yemen.
However, a portion of Iran's oil exports are effectively unsanctionable because some Chinese importers have little or no nexus to the US financial system, ClearView Energy Partners said in an Oct. 1 note. But more than 800,000 b/d potentially could be blocked by stepped-up enforcement actions, the note said.
Brent crude futures jumped sharply after the Iranian attack on Oct. 1 and traded 3% higher on the day early Oct. 2 before losing ground. NYMEX November WTI settled up 27 cents at $70.10/b and ICE December Brent ended the session up 34 cents at $73.90/b.
S&P Global Commodity Insights expects Platts Dated Brent to average $75/b in 2025 base-case price outlook, down from an average of $81/b in 2024.
Citing unnamed Israeli officials, the US' Axios news website said Iran's oil facilities could be a target by Israel as part of a "significant retaliation" for the attack from some 180 Iranian missiles. The report cited the officials saying that targeted assassinations and taking out Iran's air defense systems are also possibilities for Israeli retaliation.
"If you look at the history, war has always pushed up prices of commodities, such as oil. For buyers of oil, the good news is that oil is around $70/b. But the bad news is that -- can it stay that low?" Rogers said.
China stimulus, US economic woes
China's central bank has recently introduced an extensive stimulus package to revive relatively weak economic growth. While this move is seen by Commodity Insights as something that can support prices in the very near term, the sustainability of the optimism would depend on addressing underlying structural issues -- such as weak private consumption and ongoing deflationary pressures.
Rogers said that he would expect Beijing to continue to provide economic stimulus, which would help to keep demand for commodities at a higher trajectory for a long period of time.
"Beijing wants to have strong commodity markets. They will not give up anytime soon. They realize they have a problem and they will solve the problem. If they feel that the current set of stimulus measures are not enough, I am sure they will provide more. We are going to see these measures aiding prices of oil and other commodities," Rogers said.
However, he added that fears of slowing economic growth in the US would be a factor that could potentially cap any rally in the price of commodities.
"If you look at the cycle of economic growth, the US economy has its longest period in history without a problem and a slowdown. I would think that the problems are getting closer. It will be not surprising to see a bearish market sooner than later," Rogers said.
S&P Global Ratings expects the US economy to expand 2.7% in 2024 and 1.8% in 2025 on an annual average basis. The growth forecasts are 0.2 and 0.1 percentage points higher, respectively, compared with June forecasts, partly reflecting the impulse from financial conditions that turned more positive and partly on stronger core goods consumption than previously expected.
However, on a year-end basis, it expects US growth to come in at 2.0% in Q4 2024, down from 3.1% in Q4 2023. The probability of a recession starting within the next 12 months remains elevated -- at around 25%, S&P Global Ratings added.
"Financial and commodity markets will be cautious and will be watching the outcome of the US elections and policies. I am not selling short yet. But I hope I am smart enough to sell short when the problems hit us," Rogers said.
