Energy speaks louder than words. This week we discuss three energy market scenarios around conflict in the Middle East, how extreme heat is driving U.S. energy demand, and how energy-hungry A.I. could both help U.S. power companies and hurt Emerging Market currencies.
The three potential Iran-Israel scenarios: a limited conflict, a direct Iran-Israel war and a broader regional war each have a different impact on energy prices.
In a limited Iran-Israel tit-for-tat skirmish that causes no disruption to energy supplies, Head of Global Commodities, Cross-Asset Quant Strategies & Equity Derivatives Research Francisco Blanch believes oil prices could move up $5-10 per barrel. A direct war between these two countries that lasts several months could lead to a $30-$40 oil spike. Lastly, an all-out regional war in the Middle East impacting energy infrastructure could push up oil prices to $150/bbl and would also have a major effect on liquified natural gas (LNG). Emerging markets in Europe and the Middle East are most exposed to higher oil prices, than developed Europe and Japan. The U.S. is basically energy independent, so the first two scenarios would have little impact but a broader regional conflict could delay Fed cuts and weigh on economic growth. Importantly, we take no view on the likelihood of each potential outcome.
Although BofA Institute is separate from BofA Global Research, in celebration of the Institute’s 2-year anniversary, we are highlighting their analysis of how rising temperatures are impacting American consumers.
The U.S. got warmer from 1991-2020 and the average length of the heat wave season has exceeded 70 days in recent years, up from around 20 days in the 1960s. Extreme weather will likely mean more demand for household utilities like air conditioning and higher expenditures for the American consumer. According to Bank of America internal data, average utility payments in March were nearly $300, a 23% increase from 5 years ago. Individuals earning less than $50K saw utility payments increase 38% over the same time, while the Northeast and West have experienced the fastest regional price increases. Heat-exposed industries are affected, too. In 2021, data showed that 2.5 billion hours of labor were lost to heat exposure in U.S. agriculture, construction, manufacturing, and service sectors.