Rising Tensions, Rising Oil: How Middle East Tensions Can Redefine Energy Markets

First and foremost, my heart goes out to everyone affected by the conflict that erupted over the weekend.

As battles continue in Israel, the energy market has taken center stage among traders. Geopolitical events are challenging to navigate due to their fluid nature and unpredictability. Here's what you should note about the oil market:

Israel isn't a major oil producer. In fact, the U.S. Energy Information Administration (EIA) states that the country produces fewer than 6,000 barrels per day. They have two refineries with a combined capacity of almost 300,000 bpd, which is below their daily consumption. The current market threat centers on energy product transportation corridors. Tensions between Iran and Israel are at an all-time high, and Iran's potential involvement could significantly impact the region's energy markets.

Iran controls the Strait of Hormuz, a vital corridor through which an estimated 20-30% of global oil inventory passes. The EIA suggests that approximately 75% of this goes to Asian markets. While Lebanon, another party in this conflict, isn't a significant energy producer, their close ties with Iran pose risks to the energy markets in the region.

From a market perspective, the focus should be on the price difference between Brent crude and West Texas Crude (WTI). WTI typically trades at a discount to Brent due to transportation costs. A narrowing spread between these oil products indicates increasing demand for WTI, aligning with rising export totals seen in recent EIA reports. If the current trend continues, the U.S. could reach record export numbers by year's end.

The Russia/Ukraine conflict previously caused a shift in Europe's energy supply chain, with nations depending on Russian gas seeking alternative partnerships. This increase in demand for liquified natural gas (LNG) was beneficial for the expanding LNG industry in the U.S., one of the world's largest natural gas producers. A similar shift might occur due to the current conflict in Israel. With WTI prices nearing those of Brent, U.S. producers might boost production, anticipating potential changes in the Middle Eastern and Asian supply strategy. Monitor the Baker Hughes' Rig Count report released on Fridays; an increase might indicate U.S. energy producers are gearing up for a unique opportunity.

The saying goes, "rising tides lift all boats," and this is evident in the current energy stock prices. With crude oil prices increasing over 3%, companies like Exxon Mobil XOM and Chevron CVX are rallying. However, these energy giants also face significant geopolitical risks. For instance, Chevron operates in potential conflict zones like the Arabian Gulf and off Egypt's coast. Yet, increased domestic production and export demand might benefit oil transportation companies like Teekay Tankers LTD TNK and Euronav NV EURN, who might raise rates in response to the geopolitical risk, boosting their revenue.

Proceed With Caution

Trading around geopolitical events is tricky. The "fog of war" and the rise of social media can amplify misinformation, and algorithmic trading can intensify market volatility. Rely more on fundamental data during environments such as this one and be cautious of relying solely on technical analysis. Track producer positioning and announcements from energy companies. Escalations could spike energy prices, while de-escalation might have the opposite effect. Observing the price spreads between crude and brent, or between crude and gasoline, can offer clearer insights. Remember, the market always tries to find an equilibrium once all information is available.