Fears are growing that escalating Middle East tensions could prompt a spike in oil prices, which would disrupt the global economic recovery and spoil the equity-market rally. While we can’t predict what will happen between Israel and Iran, we can do our best to put those fears in perspective.

Research conducted by our analysts suggests that a spike in oil prices triggered by an Israeli or U.S. strike on Iran would be painful but short-lived. This isn’t based on geopolitical analysis — which is not our forte — but on a study of the underlying dynamics of the global energy market.

When oil prices spiked in June 2008, the forward curve for Brent crude implied that oil would jump to $140 a barrel and stay there for years. Today is different. Although oil currently trades at more than $120 a barrel, forward curves anticipate that this tightness will not last. Some of the recent market tightness has been driven by above-average winter demand in Europe and Asia, as well as the shutdown of Japanese nuclear facilities and supply disruptions in Sudan. Although the forward curve has steepened a bit today versus last year, it also reflects expectations that oil prices will subside within a few months, ultimately dropping to about $90 a barrel.

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