Let’s set aside both the human and geopolitical implications of the drone strike of Iranian general Qassem Soleimani for just a few moments. As investors, these implications are (perhaps a little coldly) secondary to the market impact of increased hostility in the Middle East and the potential for retribution and escalation. Given the crux of Middle East power is often credited to its disproportionate control of the global energy market, the primary barometer used to measure tension is the price of oil.
In other words, if the price of oil jumps, that means investors are significantly worried about energy supply shock which might arise from conflict. If the price of oil stays steady, investors don’t ascribe any meaning to recent events. If the price of oil falls, investors believe supply of energy will remain robust and may even expand.
In response to the events of the past week, the Brent Oil futures climbed to $70.74. In the past 12 months, Brent Crude Oil prices have ranged from $51 to $74. So, the price of oil is a bit on the higher side, but well within the normal range we’ve come to expect in the past five years, especially since the marginal costs of hydrofracking keeps oil prices range bound between $40 and $80. In other words, while there are certainly headlines being drawn up, investors don’t yet see any material supply shock yet.