How will Conflict with Iran Affect the Price of Oil?01-07-2020 |
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 1/03/2020. Rates and Economic Calendar Data from Bloomberg as of 1/03/2020. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Global developed equity markets finished lower for the week, following a military conflict between the U.S. and Iran. In the U.S., the S&P 500 Index fell to a level of 3,235, representing a loss of 0.12%, while the Russell Midcap Index lost 0.05% for the week. The Russell 2000 Index, a measure of the Nation’s smallest publically traded firms, returned -0.42% over the week. On the international equities front, developed markets fell by 0.01%, while emerging markets finished up 0.48%. Finally, the 10-year U.S. Treasury yield finished the week at 1.80%.
Oil markets rallied over 3% following the military conflict between the U.S. and Iran, leaving many to question whether oil could continue to climb higher. In our view, the scope of Iran’s oil production, in relation to global oil production, is far too narrow to have a prolonged material impact on the price of oil. Price discovery in most commodity markets tends to be dominated by supply and demand dynamics, and the oil market is no exception. For decades the price of a barrel of oil has been heavily influenced by the Organization of the Petroleum Exporting Countries (OPEC).
OPEC is an international cartel whose stated mission is “to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic, and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry.” In other words, it’s a collection of some of the world’s largest oil-producing countries that regularly meet to determine oil production levels with the sole purpose of influencing oil prices.
Fortunately, the effectiveness of OPEC in setting the prevailing market rate for a barrel of oil has waned in recent years, thanks in large part to the United States’ decision to start exporting oil. In 2019 global oil production registered at about 100 million barrels per day. Of the 100 million barrels produced per day, OPEC members accounted for about 35 million, of which, Iran provided 3.5 million. Meanwhile, the United States pulled nearly 15 million barrels out of the ground per day, more than any other individual country. Given this context, we don’t view Iran’s share of global oil production (3.5%) as significant enough to meaningfully alter the outlook for oil. Instead, we attribute the recent spike in the price of oil to a short-term, knee-jerk reaction to the U.S./Iran conflict rather than a material change in fundamentals that would warrant an increased price target.
With that said, increased levels of volatility should be expected, which is why we continue to encourage investors to stay disciplined and work with experienced financial professionals to help manage their portfolios through various market cycles within an appropriately diversified framework that is consistent with their objectives, time-frame, and tolerance for risk.
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