How will Conflict with Iran Affect the Price of Oil?
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.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.