The Israel-Iran war has taken center stage today. As you may know, Israeli defense forces launched multiple bombs into Iran successfully striking about one hundred targets, including Iran’s nuclear facilities. Israel also killed six scientists. Among them were two of Iran’s top nuclear scientists. Israel also eliminated at least four military leaders including Maj. Gen. Hossein Salamani, the man in charge of Iran’s Islamic Revolutionary Guard Corps. In retaliation, Iran launched a hundred drones against Israel. According to multiple sources, Israel successfully shot down all drones. While Israels attack dealt a serious blow to Iran’s already weak military force, investors around the world are watching oil prices rise and stocks fall. How long could these conditions persist? Should investors sell stocks on the news or ride it out?
Israel-Iran War: Oil Prices
During the first few months of the Trump presidency, the price of oil and gasoline fell. This is a key reason inflation has dropped to 2.4% over the past 12 months, less than 0.50% from the Feds target rate of 2.0%. After peaking January 14 at $80.73, oil fell to a low of $58.50 on May 2. In the aftermath of yesterday’s attack, the price of oil has risen to $72.32 on fear of less supply. Will the United States and other countries be able to increase supply to help stabilize the price of oil?
The purpose of drilling for oil differs from the United States to the Middle East. In the U.S., drilling for oil is conducted by companies looking to profit while in the Middle East, oil production is conducted by the government and is a major source of revenue. In America, oil companies tend to produce at maximum capability while in the Middle East, there tends to be more room to expand production. Will supply keep up with demand? That depends.
Iran has said it will interfere with oil shipments traveling through the Strait of Hormuz. The Strait of Hormuz is a narrowed passage linking the Persian Gulf with the Gulf of Oman and the Arabian Sea. Will Iran succeed? Most experts think not. If correct, the price of oil may not stay elevated for long. We’ll see.
Israel-Iran War: Stock Prices
Stocks fell on the news of the Israeli attack, which is no surprise. Stock markets tend to overreact to news events, and this morning was no exception. After falling about 1.60% initially, the DJIA rebounded and was down 0.87%. Currently, it is down about 1.46%. The situation in the Middle East is very fluid and things can change rather rapidly. But if today’s action is any sign, the problem may not pose as severe of a threat to financial markets as initially thought. We’ll know more as stock trading approaches the end of the trading day. Why? If stocks rebound and future attacks are minimal, this could be short lived. However, if Iran is successful in a counterattack, Israel would likely strike back with even greater force, and other countries may decide to get involved. Even now, Iran has launched multiple missiles against Israel, including the city of Tel Aviv. While the tiny country of Israel has a stronger military than Iran, how much damage will Iran cause? That is the wild card here.
If this conflict lingers, would other countries get involved? It’s possible but may not be likely. Why? Currently, Israel has a decided military edge over Iran so it’s logical to assume that the first country to get into the fray would be to help Iran. The list of those countries includes Russia, China, and perhaps a country or two in the Middle East. Russia is struggling economically with its war against Ukraine and probably would not get involved as it would further stretch its limited resources. China is reportedly on the verge of an important trade agreement with the U.S. and may not want to jeopardize it. If a country in the Middle East gets into this conflict, it could cause the price of oil to rise, but stocks may be less affected. In support of Israel, I doubt the U.S. would get deeply involved but do expect we will be prepared to act if necessary.
How will the Israel-Iran war turn out? While no one can say with certainty, Iran may not be up to the task of succeeding in a war against Israel. If this is correct, Iran would be unable to cause a major disruption in global financial markets. Therefore, oil could go higher, but I expect stocks will moderate and look beyond this conflict, focusing instead on the U.S. economy, tariffs and trade, and inflation. We’ll see.
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