Israel-Iran Conflict Causes Oil Price Hike

Oil markets tend to react sharply to tensions in the Middle East and this time is no different. WTI crude oil spiked around 13% at one point, and it’s had the most significant gains in nearly six months. This pressure is mostly tied to supply line concerns and likely production halts in the event of a prolonged conflict.

Oil supply disruptions and possible demand pressure

Iran is a major oil producer, and its involvement in this conflict is likely to hurt global supplies. Even though Iran is sanctioned by many Western countries, a disruption in its oil production may create a rippling effect.

China is Iran’s primary oil purchaser, buying over 90%, followed by Syria and UAE. If these countries were forced to stop purchasing Iranian oil, they would need to seek alternatives to make up for that loss. China buys around 1.5 million barrels of oil per day. That’s a significant amount it would need to source elsewhere.

As such, if China (as well as Iran’s other buyers) would look to replace their supply with alternative exporters, they may create a significant amount of demand tension.

And while that may already be enough to drive prices up somewhat, it’s not the only direct or indirect factor that could impact energy prices. In fact, the conflict could also block the Strait of Hormuz.

Strait of Hormuz Disruption Could Shake Global Oil Markets

This is important because beyond Iran, many other top global oil exporters export oil via the Strait.[AS1]  As such, the following countries may also have issues delivering their oil:

• Saudi Arabia  
• Iraq    
• UAE    
• Kuwait
• Qatar  
• Bahrain

The oil that goes through the Strait of Hormuz mostly goes towards Asian markets, but it accounts for between 20 and 30% of all seaborne oil, with no alternatives existing for Gulf exports.

This is a much more significant disruption, and if the passageway were to remain blocked for some period, it could have a major impact on oil prices. Some countries, like the UAE, have a way of circumventing the Strait of Hormuz via pipelines, but these have limited capacity and are a small fraction of the total oil amount that goes through.

China is the most likely to suffer from this, since it’s the biggest importer through the Strait of Hormuz. However, such a large disruption is almost sure to have a global effect.

The market implications of oil supply difficulties

Obviously, the demand for oil on a global level is unlikely to change significantly. It’s a mainstay in many industries as well as everyday life, with alternatives being sparse and relatively obscure. As such, a significant supply chain disruption is likely to cause friction and price increases.

For oil traders and investors, this is a welcome event. There’s no two ways about it; if oil prices go up, those holding oil or in active buy positions are content.

However, in general, the effects of conflict and oil price increases are adverse in the world of trading and investing. Major markets tend to go down, making it difficult for those holding long-term positions. Additionally, news comes quickly in this period, requiring traders to keep a close eye on events. Markets react rather sharply and rapidly take turns, making it difficult for inexperienced traders to navigate.

Furthermore, anyone who gets involved in trading during a turbulent event needs to be prepared to trade within bear market conditions. In general, investors enter a risk-off mood and hold off on investing altogether. Broadly, this causes markets to retract.

But mood isn’t the only thing that affects these markets. Many very real factors affect industries and governments during global conflicts and oil shortages.

For starters, due to oil being so crucial in so many operations, inflation tends to occur, with central banks commonly raising interest rates. This reduces interest in bonds and stocks, dampening their prices. It also may postpone any planned rate cuts, creating less room for large rallies in the markets.

Next, oil-sensitive industries, which means most industries, are likely to suffer during these times. Costs can increase significantly, pressuring their stock prices.

The silver lining for traders

While the conflict between Israel and Iran is horrific, it may not have as profound of an effect on the trading world as it may seem. First, it’s important to note that conflict almost always creates an overreaction in markets. Quite simply put, it creates a lot of uncertainty and fear, and investors instinctually pull back.

This retraction is generally emotional. It’s rare for skirmishes to have a lasting effect, and if they do, the global market usually finds a way to recover. As such, significant shifts can look scary on a portfolio, but it’s enough to wait them out, as they tend to last days or weeks.

In this particular case, the long-term concern is the Strait of Hormuz being blocked for an extended period. Other than that, it’s unlikely that the conflict to have a lasting impact on global markets.

Trading opportunities in tough times

The fact that markets aren’t in a good state doesn’t mean that investors are doomed. In fact, many new opportunities arise in such market conditions, making them a great chance for flexible traders to capitalise on others’ inactivity.

For starters, safe-haven assets tend to rise in situations of global fear. In this case, the greenback, Japanese yen, and gold have already shown growth. Investors tend to flock to these assets during market danger, as they have been shown to hold value in such situations.

Additionally, some traders wager on overcorrections during times of conflict in the world. As mentioned earlier, market effects are usually temporary, which makes swing trading a particularly alluring tactic. However, this is riskier, since swings can happen quicker than safe-haven assets tend to move, and predicting when they will happen can be difficult. Decisions are usually made suddenly, so traders who want to capitalise on the situation need to be proactive rather than reactive.

Altogether, the conflict will present a time when traders need to adapt to rapidly changing circumstances rather than blindly stick to a tactic applicable in normal conditions.

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