How Middle Eastern Tensions May Blow Up Commodities
Any uncertainly in the Persian Gulf will affect crude oil supply and demand.
Over the last 24 hours, tensions between the Iranian republic and Israel have become more pronounced. As Iran fears a US-backed attack by the Israelis, the nation has decided to start pursuing rampant military drills in order to prepare itself for the worst.
Its most recent drill took place in the Straits of Hormuz, a strategically significant waterway bordering southern Iran. It is also used to export crude oil and petroleum from the Persian Gulf. It is no surprise that once the Iranian government shut down the waterway, energy futures spiked.
This latest act of self-defense by the Iranian government is disturbing on various levels. First, it signifies an increased risk of Middle Eastern violence. Regardless of morals and principles, further violence between the Israelis and Islamic nations could very well drag the US into further military conflict, in a time when the US has to do anything it can to cut costs and bolster savings.
While the US has a strategic alliance with Israel, the government should think of its constituents first. Could the government actually afford another global-scale war? It also has to consider that its citizens are highly susceptible to fluctuating gas prices. As already seen today, commodities including crude oil and gasoline have risen over 2%. In the event that a full-scale conflict arises, prices are sure to increase even more.
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 skyrocket. 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.
Iran is unlikely to keep the Straits of Hormuz shut down for a long time, so investors will undoubtedly see lowering energy prices as tensions ease up. However, they always have to consider a long-term view. If military action proceeds, commodities will increase dramatically and could severely compromise millions of Americans' abilities to live comfortably.
While the Straits of Hormuz action does not directly affect the economy, it definitely made its mark on commodities, as any possible news that affects the supply and demand of crude oil will move markets.
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.
- 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.
Traders who believe that the Middle East will remain peaceful may consider an alternate position:
- Short an ETF that tracks crude oil or natural gas, such as the US Oil Fund (USO) or the US Natural Gas Fund (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 (RIG) or BP (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.
Editor's Note: This content was originally published on Benzinga.com by Abhi Rao.
Below, find some more great ETF and market content from Benzinga:
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter