Like it or not, every time Americans visit the gas pump, we experience the influence of Middle East affairs. Analyst estimates put the risk premium in oil prices as high as $20 per barrel, meaning that absent tensions in the Middle East oil prices might be in the 80′s instead of the 100′s. This translates into gasoline prices over 50 cents higher than they might otherwise be – a huge impact for the American consumer.
While there’s almost always some risk premium built into the price of oil, tensions over Iran’s nuclear development program have increased this premium of late. Will Israel strike Iran’s nuclear facilities to prevent further development of a weapon? Some prognosticators feel that a strike is becoming an inevitability, and markets are giving this increasing weight. Is it any surprise that more investors (and more of your clients) are asking, “What happens to my portfolio if Israel strikes Iran, or if we go to war?”
HiddenLevers models a wide range of macro-economic and geopolitical scenarios, using a risk-parity approach. While the future cannot be predicted, we can examine and prepare for different plausible outcomes. In the case of a conflict with Iran, an Israeli strike might cause Iran to attempt to shut down oil traffic through the Straits of Hormuz, leading to a moderate rise in oil prices:
It’s no surprise that oil prices rise and stock markets fall in both scenarios, but some investments are better positioned for these scenarios than others. Even among oil companies, oil major Exxon Mobil (NYSE:XOM) has only a small positive correlation with oil, while competitor Occidental Petroleum (NYSE:OXY) moves up 1.7% for every 1% move in oil prices! HiddenLevers analyzes the exposure of every investment to economic levers like oil, and uses this data to stress test portfolios against scenarios like Armed Conflict with Iran.
To find out more about these scenarios and to see HiddenLevers’ scenario modeling and stress testing in action, join us for a webinar on Thursday, March 29th at 4:30PM EDT, where we will discuss Iran scenarios and how HiddenLevers can be used to stress test and protect your portfolio against scenarios like these.