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What does the tension in the Gulf of Oman mean for oil?

The price of oil spiked after two tankers were attacked in the Gulf of Oman. John Stepek looks at how an escalating conflict could affect markets – and your money.

190614-oil-price
A third of all seaborne oil transport goes through the Strait of Hormuz

Just before I get started this morning, I just wanted to highlight an event taking place later this year that I reckon will interest the vast majority of you on 9 October, in London, MoneyWeek's David Stevenson will be talking to Charlotte Ransom of Netwealth with The Week's Jane Lewis about how to pay for retirement. Book your tickets here now.

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Back to today's topic, and oil has had a volatile week.

Brent crude fell hard on Wednesday after US oil stockpiles came in higher than expected.

But then the price jumped again yesterday, after two oil tankers were attacked in the Gulf of Oman.

What's going on? And what does it mean for your portfolio?

What conflict in Iran might mean for your money

Whatever else you want to say about Donald Trump (and I'm not a fan), compared to other US presidents, he's been something of a pacifist. One idea behind "America First" as a policy, is that the US no longer acts as global policeman.

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I think it's fair to say that the majority of Trump's core supporters think that America has spent far too much blood and treasure on wars in foreign countries of dubious purpose.

That said, tension with Iran has been a constant during Trump's administration, and it's only getting worse.

Yesterday, two oil tankers one Norwegian, one Japanese were severely damaged by "unknown weapons" (reports the FT) in the Gulf of Oman, which is near the Strait of Hormuz. No one was hurt but the vessels were left drifting.

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This matters for the oil price because about a third of all seaborne oil transport goes through the Strait of Hormuz. So if there's the chance that it will be shut down and Iran has a history of threatening to do so then that has a serious impact on oil.

And this isn't the first such incident. Last month, Saudi Arabia complained that a number of ships had been targeted off the coast of the UAE. The US has also sent more military resources to the region.

Iran denies that it is behind the attacks. The US and Saudi Arabia say that it is. You can construct all kinds of conspiracy theories here, which I have no desire to do, but there's little doubt that the Saudis would like the US to put the boot into their number one rival in the region. At the same time, Iran isn't exactly short of trouble makers either.

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Now, as I said earlier, Trump's base are not keen to get involved in more wars that they see as none of their business. But there are a lot of "hawks" in his government who have been itching to get a crack at Iran for years. So it's not obvious which way this would go.

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I would very much rather avoid any sort of conflict in the region for the obvious reasons. It's an extraordinary waste of life, and the people who start these things are rarely the ones who bear the worst consequences (which is one big reason that they get started in the first place skewed incentives).

Putting all that aside, what does this mean for your portfolio?

In all likelihood? Very little.

Why war rarely has a long-term impact on markets

While conflict draws headlines, markets are historically pretty blas about it. There are short-term reactions certainly. And if specific companies and sectors are directly involved, then yes, of course there's an impact.

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But callous as it might sound, investors can mostly ignore geopolitical conflict when it comes to their overall investment strategy.

Indeed, from an investor's point of view, the main impact of any conflict in this region would boil down to whether a higher oil price could have knock-on effects on inflation, and therefore, the willingness of the Federal Reserve America's central bank to cut interest rates at a push.

Markets are currently desperate for the Fed to cut rates. They seem to feel that we're on the verge of collapse unless we see urgent action from Jerome Powell and company.

The good news for markets is that even if the oil price did shoot up, it's unlikely to dissuade the Fed, which has a remarkable ability to ignore inflation of almost all kinds as being temporary. Instead, the Fed's decision will boil down to whether or not Jerome Powell decides to indulge the market or not.

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Meanwhile, the International Energy Agency (IEA) pointed out this morning that, in any case, soaring US oil production is offsetting attempts by oil cartel Opec to prop up prices by cutting production.

The IEA reckons that non-Opec supply will grow from 1.9 million barrels a day to 2.3 million next year. This means the world won't need as much from Opec. In fact, it'll need less than Opec is currently pumping.

This of course, is another reason behind all the current tension in the region. The US shale glut is destroying the business model of all of these countries that produce oil but not a lot besides. If you run a dictatorship, and your economy is running into trouble, the first port of call is to find an external enemy to focus civil frustration on.

So all in all, this is concerning incident on humanitarian grounds. But does it make a difference to your portfolio? Most likely not.

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