Author Topic: Do oil prices reflect chance of US/Iran escalation?  (Read 1056 times)

MustacheAndaHalf

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Do oil prices reflect chance of US/Iran escalation?
« on: January 03, 2020, 11:00:41 AM »
As of 1 pm in New York, "US Oil ETF" (USO) has gained +2.5%.  Is that too little?

Sometimes the stock market needs to incorporate political events - to estimate the impact.  I think it was just 6 months ago that Iran captured a UK oil tanker, and around that time "someone" attacked oil tankers in that same area.

In the past, Iran has threatened to close the Straight of Hormuz, where 1/4th of the world's oil supply travels.  It seems likely they would at least threaten to that next week, after their 3 day period of national mourning (over the general the US air strike killed).  Iran has vowed revenge.

On the markets, energy companies are down -0.50% (Vanguard Energy ETF, VDE) while oil prices are up +2.5%.  This seems like a muted reaction to something that Iran has said is an act of war.  Do others have a better explanation for the +2.5% change in oil price?  (Earlier today it was almost +4%).

Bernard

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Re: Do oil prices reflect chance of US/Iran escalation?
« Reply #1 on: January 03, 2020, 01:52:15 PM »
Stock prices reflect assumptions and speculations, and speculators assume that the recent Iran incident may cause a small shortage of crude oil on the world market, hence the slight correction. But unless the United States turns Iran into a crater, which is highly unlikely to happen, there will be no noticeable shortage.

ChpBstrd

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Re: Do oil prices reflect chance of US/Iran escalation?
« Reply #2 on: January 03, 2020, 02:59:23 PM »
Someone with deep enough pockets could shoot up a few oil tankers, bomb 3-4 key pipelines, or mortar a refinery and make billions in the futures market.

Or, an unscrupulous politician could invest their campaign funds in oil contracts and then order a military strike (just sayin...) Tripling oneís campaign cash might be enough to win an election.

And because such low probability, high impact events are baked into the prices of futures and options, the price of oil and other commodities stays slightly higher than supply and demand alone would lead you to expect.

PDXTabs

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Re: Do oil prices reflect chance of US/Iran escalation?
« Reply #3 on: January 03, 2020, 06:25:18 PM »
In the past, Iran has threatened to close the Straight of Hormuz, where 1/4th of the world's oil supply travels.  It seems likely they would at least threaten to that next week, after their 3 day period of national mourning (over the general the US air strike killed).  Iran has vowed revenge.

The markets are not pricing in the Straight of Hormuz closing. If you think that the Straight of Hormuz will close you should go buy some oil futures.

MustacheAndaHalf

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Re: Do oil prices reflect chance of US/Iran escalation?
« Reply #4 on: January 03, 2020, 07:22:03 PM »
I agree oil futures would be the way to speculate on an escalation.  For me, at most I could take a second look at commodities in my portfolio.  If stock markets stumble, or oil prices rise sharply, then having a small allocation to commodities may help (but those funds tend to have higher expense ratios and no dividends/interest payments).

The article below points to how oil reacted when Saudi oil production facilities were bombed.  Oil prices initially surged up +8%, but then recovered as Saudi Arabia got oil production back online quickly.
https://www.cnbc.com/2020/01/03/analysts-oil-is-likely-headed-higher-amid-us-iran-tensions-but-dont-expect-a-spike.

@ChpBstrd - I guess there's a "tension in the middle east" fee attached to oil, as you mention.   So the market close of +2.9% could reflect higher tensions until something more specific is known.


Most oil ETFs charge 0.75% to 0.95%, with a few 3x versions charging 1.50%.  But I found a few on etfdb that charge less than 0.70%:
ProShares UltraPro 3x Short Crude Oil ETF (OILD, exp ratio 0.49%), which lost -8.9% Friday.
ProShares UltraPro 3x Crude Oil ETF (OILU, exp ratio 0.49%), which gained +9.0% Friday.
ProShares K-1 Free Crude Oil Strategy ETF (OILK, exp ratio 0.65%), which gained +3.0% Friday.
ETRACS S&P GSCI Crude Oil Total Return Index ETN (OILX, exp ratio 0.50%), which gained +3.1% Friday.

Note that many ETFs that own oil don't send out a 1099, they send out a more complicated form K-1.  That's why "OILK" brags about being "K-1 Free".  From the above list, OILU would be the riskiest way to speculate on what happens in the immediate future.

ChpBstrd

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Re: Do oil prices reflect chance of US/Iran escalation?
« Reply #5 on: January 03, 2020, 09:28:05 PM »
Note that with futures, potential losses are nearly unlimited. One must buy oneís way out of a losing contract or make/take delivery. Consider that any oil ETF is dealing in futures, so may experience sharp moves.

MustacheAndaHalf

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Re: Do oil prices reflect chance of US/Iran escalation?
« Reply #6 on: January 06, 2020, 04:16:08 AM »
My thesis is that some Iranian anger is reduced by their need to mourn.  So the market is watching Iran react, and those reactions are muted.  My thesis being the market is measuring Iranian anger, before that anger has reached full volume.  So I think when Iran emerges from this mourning, they will issue threats that will be reflected in stock markets and oil prices.

One counter argument is the demand for oil.  Growth in most of the world is slowing, and may enter a recession.  A slowdown, let alone a recession, means less demand for oil.  So if Iran threatens the oil supply, it doesn't matter as much if that oil isn't needed as much, anyways.  Reduced demand makes supply risks less impactful.

Will Iran target major oil producers?  If that risk is higher than expected, then oil prices are too low.  The other half of my thesis is that the risk is higher.  Iran can't win a war against the U.S., and they know it.  I believe they will avoid starting a war, but want revenge, which I think means they will attack U.S. allies.  The most prominent allies are Israel and Saudi Arabia.  It was just last year that a missile struck a Saudi oil refinery and spiked oil prices until repairs were made.  Iran has been blamed, and is the likely culprit or supplier of the missile.  When they do something similar, I would expect oil prices to rise.

So that's my thesis: Iran is mixing anger and sadness, and in the coming days that will become just anger.  They will attack U.S. allies to inflict harm in a way that doesn't give the U.S. an excuse to start a war.

I agree with ChpBstrd that futures are overly risky, as most of the time options expire worthless, so ETFs seem like a better choice.  I think I'll switch a very tiny part of my portfolio into one of the oil ETFs today.

If there's really bad news that impacts the price of oil significantly, I plan to sell a third or half of my allocation.  Repeat 2 or 3 times, and I'll have proven that my thesis was right.  But speculating against the market is a bad idea, and I could easily be wrong.  So if nothing happens by May 2020, I'll sell it all regardless of losses or gains.

When I make my purchase today, I'll quote the ETF I bought and at what price.  Friday oil moved +3% higher.  If it jumps twice that (+6%) before I can buy in, I'll abandon the whole thing, and assume the market has priced in the above risks.

If I can get political (which this thread already sort of does), sometimes I feel like my information is better than the White House's information.  So this time, I want the market to decide who is right: their view that things will stay relatively calm, or my view that things are about to get worse.

I'll update this thread on what happens with my attempted purchase.

MustacheAndaHalf

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Re: Do oil prices reflect chance of US/Iran escalation?
« Reply #7 on: January 06, 2020, 07:41:53 AM »
The price of OILU is currently $24.09 (was $24.00 minutes ago), but Vanguard won't let me buy it:

"Buy orders are not permitted on leveraged and inverse products."

Apparently this policy is about a year old:

"Beginning January 22, 2019, Vanguard clients will no longer be able to purchase leveraged or inverse mutual funds, ETFs (exchange-traded funds), or ETNs (exchange-traded notes)."
https://investornews.vanguard/vanguard-to-stop-accepting-purchases-in-leveraged-and-inverse-investments/

blue_green_sparks

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Re: Do oil prices reflect chance of US/Iran escalation?
« Reply #8 on: January 06, 2020, 08:30:38 AM »
I have some Vanguard energy ETF(VDE), mostly domestic holdings and it has barely moved. No doubt that prices at the pump have a direct effect on consumer spending, the part of the economy doing well.

It would make sense the Iranians do not want conventional war. How do they gauge the response that will be meaningful without bringing on the 52 attacks?

ChpBstrd

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Re: Do oil prices reflect chance of US/Iran escalation?
« Reply #9 on: January 06, 2020, 09:02:50 AM »
I think if the VietCong and the Taliban could beat the US, so could the Iranians and the Iraqis. Their stated goal for revenge is to evict the US from Iraq. Thatís not an ambitious goal, really. Shiíite militias already outnumber and surround the US soldiers who are mostly confined to one base. They speak the local language, have more local support, enjoy shorter supply lines, and probably have better morale. Meanwhile the energy-independent US is only in Iraq today because they were there yesterday. Iraq will become an Iranian colony, as I was predicting to anyone who would listen in 2003. In most ways they already are.

The flip side is that a US retreat from Iraq could stabilize the Persian Gulf. Iran and Saudi Arabia would negotiate directly, without trying to influence a third party located in both their lands. This third party would be the one with incoherent objectives that sometimes takes the Sunni side, and sometimes takes the Shiite side, and has a history of acting on misinformation and emotion.

The Iraqi parliament has already voted to expel the US. After the US departure, the Iranians will focus on investing in long-neglected Iraqi oil infrastructure (and use Iraq to smuggle out their own oil). Oil production could skyrocket as Iran and Saudi Arabia attempt to raise more funds to support an arms race. Prices could plummet.

In the short term, Trump would be wise to play for time. If oil prices stay high, an election year recession may occur. If he is seen as weak, Republicans wonít vote for him. If he escalates, Democrats will accuse him of repeating Wís mistakes and a public weary of perpetual war might again vote for change. Yet he doesnít have control, and the Iranians must set an example to deter future US administrations. Trumpís most attractive option is probably looking tough and attempting to mobilize hawkish conservative voters. Yet the Iraniansí most attractive option is probably to mobilize the Iraqi public and force the Iraqi government to impose a deadline for complete US withdrawal. A diplomatic and propaganda offensive, instead of a serious military attack, could cause the oil risk premium to evaporate.





PDXTabs

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Re: Do oil prices reflect chance of US/Iran escalation?
« Reply #10 on: January 06, 2020, 09:17:08 AM »
It was just last year that a missile struck a Saudi oil refinery and spiked oil prices until repairs were made.  Iran has been blamed, and is the likely culprit or supplier of the missile.  When they do something similar, I would expect oil prices to rise.

Last time whoever hit that oil infrastructure was careful not to hit any oil wellheads. This time they might not be so nice, which might be why Saudi Aramco shares are down even though oil prices are up.
« Last Edit: January 06, 2020, 09:21:27 AM by PDXTabs »

bigblock440

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Re: Do oil prices reflect chance of US/Iran escalation?
« Reply #11 on: January 06, 2020, 01:09:24 PM »
I think if the VietCong and the Taliban could beat the US, so could the Iranians and the Iraqis.

But they didn't, either time.