Market Overview

Will Iran Choke Global Oil Supply?


Middle Eastern tensions seem to be unrelenting. Since the beginning of December, the Strait of Hormuz has been a strategic, defensive target for Iran. The Strait is an extremely important waterway for Iran and other countries bordering the Persian Gulf, simply because it is used to export crude oil and petroleum out of the region. Given its significance in the Middle Eastern energy markets, which effectively translate into global energy markets, the Strait of Hormuz is a geographic location that Iran can leverage when it is trying to further its political agenda.

Over the last few weeks, the United States has accused the Iranian government of deceptively progressing its nuclear program. As such, the US government, with the support of the United Nations Security Council, has started to impose various sanctions against the Iranians. Currently, the US and allied forces seek to ban further Iranian investments in nuclear energy as well as the import and export of nuclear-related supplies.

Iran has not been the most obedient country, for a few obvious reasons. It currently views Israel as a major threat to its safety and sovereignty. With the backing of the United States as well as Western European countries, Israel has the political muscle to defend itself from the entire Middle Eastern region. Alliances, however, add another level of complexity to the situation. While Israel has the West on its side, Iran has eastern countries like China and Russia behind its back.

Another strategy that Iran has pursued involves the Strait of Hormuz. According to the Iranian Vice President, Mohammad Reza Rahimi, the Strait will be closed to oil exports if sanctions actually follow through. Earlier this month, Iran conducted various military tests in the Strait, possibly to send a message to opponents that it does to fear increased opposition or aggression.

The United States maintains a military presence around the Persian Gulf in order to facilitate free trade of oil in the region. It seems that the navy presence may not be needed if the West follows through with Iranian sanctions. Unfortunately, nearly a third of water-borne oil is transported via the Strait of Hormuz.

Iran may be able to flex its energy muscle and influence Western sanctions. It could also move oil prices and send energy markets into a tailspin, if it actually cuts off all movement through the Strait. The United States and fellow allies should reconsider harsh sanctions if it is concerned about the fidelity of energy markets. If not, traders may be in for the most volatile movements they have experienced in recent past.

Supply and demand is what dictates commodity prices, and as the supply faces increased risk to dramatically drop, crude oil and gasoline are likely to sky-rocket. This means, on a basic level, that gas prices will jump. That's not the only thing that will be affected. In a more subtle manner, mass transportation costs will increase and consumer discretionary costs will increase as companies have to pay more for fuel and consequently transportation of goods. On the other hand, Iran faces large economic risks if it shuts down the Strait of Hormuz for a long period of time. As such, prices will eventually ease if the Strait is shut down. On the other hand, if military action proceeds, commodities will increase dramatically and could severely compromise millions of Americans' abilities to live comfortably.

Investors always have to keep up with the news. While the Straits of Hormuz do not directly affect the economy, it definitely made its mark on commodities, which in turn affect the rest of the economy. Crude oil is one particular commodity that affects almost every person on a consistent basis, so traders have to keep in mind that any possible news that affects the supply and demand of crude oil will move markets. As such, traders should keep up with real-time news via Benzinga Pro to be able to act quickly when new developments occur.

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Bullish View:
Traders who believe that Middle Eastern tensions will increase might want to consider the following trades:
  • Long crude oil or RBOB gasoline futures, as fears that supply will diminish will pump up the stock price. Futures currently appear to be close to a technical support level, so now may be a good time to buy.
  • Short companies that extensively use gasoline, such as airliners or transportation companies. This should be a longer-term trade, as it will take a while for rising fuel costs to take a toll on these companies.
  • Long precious metals, as traders may fear global instability if Middle East peace is not preserved. They may flock to safe havens like gold or silver.
Bearish View:
Traders who believe that the Middle East will remain peaceful may consider the following positions:
  • Short an ETF that tracks crude oil or natural gas, such as the US Oil Fund or the US Natural Gas Fund (NYSE: UNG). You may want to stick with ETFs because this would be a longer term trade and the ETFs will be less volatile than the corresponding commodity futures.
  • If news came out that Israel agreed to maintain peace with Iran or other nations, long the equity markets, via ETFs or equity futures. This would be a short-term trade, however.
  • Miners and oil harvesters such as Transocean (NYSE: RIG) or BP (NYSE: BP) will likely be volatile, and could go up or down sharply depending on the news that's released. You could purchase straddles to take advantage of these companies' volatility.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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