We remain committed to diversification across equities, fixed income, and alternatives to buffer against energy price volatility and the associated risks it may bring.
Over the weekend, the United States, along with Israel, launched a series of airstrikes targeting a variety of Iranian targets, including nuclear sites, missile infrastructure, naval assets, and military command centers in a large-scale military operation known as Operation Epic Fury. In addition, focused attacks on leadership resulted in the death of Supreme Leader Ali Khamenei along with his family members and other high-ranking officials like Defense Council Secretary Ali Shamkhani as well as top leaders of the Islamic Revolutionary Guard Corps (IRGC). In response, Iran launched missile attacks at Israel and 14 U.S. bases across the Middle East, including Bahrain, UAE, Kuwait, Jordan, Saudi Arabia, and Iraq.
The military action has resulted in airspace closures across major cities in the Gulf region, including Doha, Abu Dhabi, Riyadh, Manam, and Kuwait City. More importantly, it has effectively closed the Strait of Hormuz due to security risks and surging insurance costs – although an official closure has not yet been announced. The Strait carries approximately 15–20M barrels per day (bbl/day) of oil flows that cannot be fully replaced, with only ~6M bbl/day able to be rerouted via pipelines; it is also the route for almost one-fifth of global LNG supply. In addition, Iran produces roughly 3.4M bbl/day of crude, exporting approximately 1.7M bbl/day, mostly to China. As with prior periods of escalation in the Middle East, the most immediate term impact is a rise in oil and LNG prices particularly if tanker attacks persist.
The attacks come on the heels of failed negotiations between the U.S. and Iran, and the next stage of the conflict will likely hinge on who fills the leadership void over the next several days. For those looking for signs of a potentially shorter conflict, one could point to Trump's openness to negotiations following (admittedly mixed) signals from new Iranian leadership and the potential backstop in the form of a Trump-Xi summit in roughly one month. This meeting is particularly important given that China imports 10-12M bbl/day of oil (~13% of their total consumption) or approximately 6x that of the U.S. As a result, China has a strong economic incentive to facilitate a negotiated settlement.
With that said, a longer conflict in the Middle East could weigh on global economic growth via higher oil prices and the perception of heightened geopolitical uncertainty. While Saudi Arabia has already committed to rerouting some of its supply via pipeline and U.S. naval escorts of tankers could allow some supply to pass through the Strait, an extended disruption of energy supplies flowing through the Strait lasting more than one to two weeks could push oil prices closer to the $100 per barrel mark. (As of this writing, prices were above $72 per barrel for WTI Crude and $78 per barrel for Brent.) The world now grapples with the potential for further escalation or de-escalation, with each path carrying implications for the global markets.
In our view, the overhang of Middle East tensions is unlikely to abate overnight and will more meaningfully effect geographies and markets such as energy more directly impacted by the conflict. However, should these events compound recent volatility stemming from AI disintermediation concerns, we believe that risk assets may trade at more attractive valuations in the coming days, affording us the opportunity to reallocate as appropriate in line with our strategic views. More importantly, we remain committed to diversification across our equity, fixed income, and alternatives allocations, which we believe will help to insulate portfolios from some of the volatility stemming from higher energy prices, increased risk premiums, and the threat of higher inflation. We will continue to monitor the situation closely and provide support should clients express heightened concerns and remain open to pivoting our positioning should events necessitate.
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