Last time I wrote about the oil industry I mentioned Donald Trump’s idea of invading Syria’s oil supply by striking a deal with one of the big oil companies in America to extract oil from Syria’s home turf. This did not help stabilise the volatility in this commodity market. This time round it is more serious due to a strategic ordered air strike that took the life of Iranian General Qasen Soleimani.  Due to this action we are now facing supplementary instability in this field.

This ongoing and escalating geopolitical tension could help increase oil prices – price levels could surge towards $80 a barrel and could disrupt Middle East Crude supplies. Hence global oil demand and OPEC production cuts could now form part of the oil price landscape. There is, however, a dilemma: US shale production. This means that if it was part of Trump’s plan all along, to disrupt oil production in the West to boost America’s, will the American oil companies be up for the task at hand to compensate for this cut back of supply?

Data from this week showed that the international benchmark Brent crude traded at $68.65, even hitting the $69.50 price level – more than 3%, meaning that this price level was the highest since September. Shares in US oil companies such as Exxon Mobil dropped, however, amid a wider US market fall which was prompted by weak manufacturing data and concerns about the implications of the Middle East conflict.

In the hours after Soleimani’s death, “one thing is clear: Iran will respond,” analysts at political risk consultancy Eurasia Group said in a research note. “We expect moderate to low-level clashes to last for at least a month and likely be confined to Iraq. Iranian-backed militias will attack U.S. bases and some U.S. soldiers will be killed; the U.S. will retaliate with strikes inside of Iraq. Oil prices will likely hold around $70 a barrel, but could make a run at $80 if the conflict spreads to the oil fields of southern Iraq or if Iranian harassment of commercial shipping intensifies,” they added.

Earlier this week the Dow and the NASDAQ closed down about 0.8%, while the S&P 500 dropped by 0.7%. The declines followed record highs a day earlier. However, on the other side of the pond this price spike pushed oil stocks on the London stock exchange higher, with BP up 2.7% and Royal Dutch Shell nearly 1.9% higher. In Asia, markets tumbled as the Nikkei 225 declined by 1.25%.

With tensions rising between the US and Iran, the long-term consequences will largely depend on the nature of Iran’s overall response to the attack and the intensity of any conflict that follows. Till now they retaliated by firing missiles at US air camps that hosts American soldiers. After the news on Wednesday the Dow Jones Industrial average futures dropped 162 points and indicated a loss of 184.68 points. On the other hand Brent futures jumped 1.16% to around $69 per barrel.

Being that this year America will hold its state election, everything that Trump does spills into presidential politics, and without a doubt any major story, would have an effect on his presidential polls. It was inevitable that the fallout from the US airstrike that killed Iranian General Qasem Soleimani would spill into presidential politics.

In the short term, however, there are already some possible implications both for the Democratic presidential primaries that begin in less than a month and November’s general election contest. Traditionally, a US president facing a major foreign policy crisis benefits from at least a short-term bump in public support. Barack Obama saw no change in his approval ratings during the 2011 air war in Libya. However when Donald Trump fired missiles at a Syrian air base in response to that nation’s use of chemical weapons, the slight increase in his ratings appear in hindsight to be little more than statistical noise for a man whose approval has been relatively stable throughout his presidency. So is Trump trying to get re-elected based on historical data? Was this attack pre-empted and was this Donald’s trump card all along, for this attack to be his wildcard for his presidential re-election campaign?

Tensions between the US and Iran have been rising since 2018, when the US pulled out of a nuclear deal meant to control Iran’s nuclear program and prevent the country from developing nuclear weapons. In my view this is one of the sanctions that Trump wanted to use as a political gain as he looked to put a feather in his cap for presidential re-election. The US also re-imposed sanctions on Iran, a move that has shattered the country’s economy and severely restricted its oil exports.

It is well known to all that the potential disruption to the global oil market from conflict in the Gulf is severe. The US Energy Information Administration estimates that 21% of oil used in 2018 passed through the Strait of Hormuz, a narrow passage which has Iran on its northern shore.

Some of the biggest producers would be affected if the Strait could not be safely navigated. Saudi Arabia, Iraq, Kuwait, Iran, United Arab Emirates (UAE) and Qatar all ship some or all of their exports via the Strait. Saudi and the UAE have pipelines that bypass the Strait but they have nowhere near the capacity to supply all the oil. There is also the possibility of Iranian military action against other countries’ oil installations.

With volatile energy prices looming, due to recent unforseen circumstances, it could be a good idea for investors who would like to invest in this sector to drip feed, possibly by means of a regular savings plan,in either a specialised fund or an ETF. ‘Buy low, sell high’ is a famous statement in the financial world. While market timing is nearly impossible, it is evident that when markets go through a negative patch, investors tend to stay away from most risky assets, ignoring their investment objective at the outset. By cost averaging – a strategy used by long-term investors to take advantage of different market cycles in order to boost their investment returns – investors can benefit from purchasing units at different prices and smoothening out their initial cost.

 

Matthew Miceli Donnelly, ICIWM, B.Com Banking & Finance & Management (Melit.), B.Com (Hons.) Management, MBA (Melit.), is an Investment Advisor at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]