To The Moon

$Exxon Mobil(XOM)$ $Occidental(OXY)$  [Miser]  Will oil prices rebound due to these geopolitical strains, or are we heading towards new lows? In my opinion, the mounting tensions are likely to cause oil prices to rebound rather than hit new lows.

As of October 2023, relations between Iran and Israel have deteriorated significantly. Incidents ranging from cyber-attacks to skirmishes involving proxy groups have heightened fears of a broader conflict in the Middle East. Given that this region is a crucial hub for global oil production and transportation, any instability here tends to have immediate repercussions on oil markets.

Historical Impact of Middle East Tensions on Oil Prices

Historically, geopolitical tensions in the Middle East have led to spikes in oil prices. Here are some notable instances:

• 1979 Iranian Revolution: Oil prices doubled from $15 to $39 per barrel within 12 months.

• 1990 Iraqi Invasion of Kuwait: Prices surged from $21 to $46 per barrel in less than a year.

• 2011 Arab Spring: Brent crude oil prices increased by about 20% due to supply concerns.

These events underline how geopolitical instability can disrupt supply chains, causing traders to bid up prices in anticipation of shortages.

Current Oil Market Dynamics

• Supply Factors: OPEC+ countries have been cautiously managing oil output to balance prices amid global economic uncertainties.

• Demand Factors: The global economy is gradually recovering from the pandemic, increasing demand for energy.

• Inventory Levels: According to the U.S. Energy Information Administration (EIA), global oil inventories have been declining, which typically supports higher prices.

Potential Supply Disruptions

The Strait of Hormuz, a narrow passage between the Persian Gulf and the Gulf of Oman, is one of the world’s most critical chokepoints for oil transit. Approximately 20% of global oil passes through this strait. Any conflict involving Iran raises the risk of disruptions in this vital corridor.

• Risk Premium: Markets often add a risk premium to oil prices during periods of heightened tension. Analysts estimate this premium can add anywhere from $5 to $10 per barrel.

• Shipping Concerns: Past incidents, like tanker attacks in 2019, led to immediate price increases due to fears of supply interruptions.

Market Speculation and Investor Behavior

Investor sentiment plays a significant role in commodity pricing:

• Hedging Activities: Traders may increase long positions in oil futures as a hedge against potential supply shocks.

• Volatility Indexes: The CBOE Crude Oil Volatility Index (OVX) tends to rise during geopolitical crises, indicating higher expected price fluctuations.

Counterarguments: Factors That Could Lower Oil Prices

While the tensions suggest a rebound, some factors could counteract this trend:

• Increased Production Elsewhere: Non-OPEC countries like the U.S. could ramp up production to fill any supply gaps.

• Global Economic Slowdown: If tensions escalate into a broader conflict, global economic growth could slow down, reducing oil demand.

• Alternative Energy Adoption: Prolonged high oil prices might accelerate the shift towards renewable energy sources.

Considering the historical precedent and the current geopolitical scenario, it’s more likely that oil prices will rebound in the short to medium term due to:

• Supply Concerns: Potential disruptions in the Middle East affecting global supply chains.

• Risk Premiums: Added costs factored in by markets to account for uncertainty.

• Speculative Trading: Investors positioning themselves in anticipation of price increases.

Final Thoughts

Geopolitical tensions like those between Iran and Israel have a proven track record of influencing oil prices. While nothing is certain in the markets, the current indicators suggest a rebound in oil prices is more probable than a drop to new lows.