The Middle East is crucial for the global economy due to its strategic importance, in particular owing to its vast reserves of oil and gas. Yet it has also been a site of geopolitical unrest for several decades.
Most recently, the region has become unstable due to the outbreak of the Israel-Hamas War in 2023, with the conflict even threatening to expand into the wider region.
For investors, understanding the ways that the geopolitical challenges in this region affect the global markets is essential for effective trading. With this in mind, we’ll explain how conflict in the Middle East affects the global financial markets in this article.
Oil price volatility
The Middle East is home to a significant portion of the world’s oil reserves, with countries such as Saudi Arabia, Iraq and Iran among the top oil-producing companies across the globe. Due to this concentration, conflict in the region can have a disproportionate impact on the global supply of oil. Even the potential for disruptions can lead to significant spikes in prices due to anticipation.
Oil and gas companies make up a significant portion of some stock indices such as the FTSE 100. While rising oil prices can lift the prices such indices, as well as the stock prices of individual oil companies, they can also have a negative impact on industries that are heavily reliant on oil, like aviation and logistics.
Global trade disruptions
Certain regions of the Middle East are important links in global trade routes. For example, Egypt’s Suez Canal is a vital shipping lane used heavily in maritime trade. Similarly, the Strait of Hormuz – a narrow waterway between the Persian Gulf and the Gulf of Oman – is the only naval route connecting the Middle east and the Indian Ocean, making it one of the world’s most important oil chokepoints.
Tensions and conflict in the Middle East can disrupt these critical pathways. For example, some analysts predict that if the United States tightens sanctions on Iran for its role in the Israel-Hamas conflict, then Iran could retaliate on US ships in the Strait of Hormuz.
Geopolitical events such as these can lead to delays and added costs for international businesses. In turn, this can lead to increased costs of goods, drive inflation prices and impact the entire economies of nations across the world.
How can traders do to mitigate risk?
Given the uncertainty of the situation, it’s vital that investors stay informed on breaking developments and educate themselves on the complex connections between the Middle East and the global markets.
A well-diversified portfolio can help hedge against sector-specific risk, while well-informed and cautious trades could allow savvy traders to make the most of the situation.
