Macquarie Group has warned that oil prices could spike to $200 per barrel if the Iran war extends into June and the Strait of Hormuz remains shut, per Bloomberg, as quoted on Yahoo Finance.
Analysts estimate a 40% probability of this high-risk scenario. However, there is a 60% chance of the war ending by the end of the month. Brent crude is hovering near $110 per barrel currently. Note that its all-time nominal peak was $147.50, hit in July 2008.
Supply Shock Rocks Global Energy Markets
The ongoing conflict involving the United States, Israel and Iran has disrupted the oil-rich Middle East. Tehran’s near-total closure of the Strait of Hormuz has severely restricted global energy flows. Analysts noted that if the strait remains closed for long, oil prices may rise sharply to destroy demand and rebalance markets.
Geopolitical Developments Add Uncertainty
Donald Trump recently delayed potential strikes on Iran’s energy infrastructure by 10 days, pushing the timeline to April 6. In a temporary easing move, Iran allowed 10 oil tankers to pass through the strait.
Bottom Line
The trajectory from here hinges on how long the disruption lasts and how much physical damage happens to the energy infrastructure. According to Rystad Energy’s estimates, energy infrastructure repair and restoration costs to date could be at least $25 billion, based on an initial assessment of impacted facilities, and they are expected to rise further.
In the war, Israel attacked Iran’s South Pars gas field. Later, Iran apparently targeted natural gas infrastructure in Qatar and the United Arab Emirates, as quoted on Yahoo Finance. With Qatar being the world’s third-largest gas exporter, any strike could be a massive hit to the global supply.
Per Jim Krane, a fellow in Middle East Energy Studies at Rice University’s Baker Institute, there have been direct attacks on multibillion-dollar infrastructure that’s going to take as long as five years to fix. This is likely to keep a significant portion of global liquified natural gas supplies off the market for a long time, as quoted on Yahoo Finance.
ETFs in Focus
Against this backdrop, investors should closely track energy exploration ETFs like State Street Energy Select Sector SPDR ETF XLE, iShares US Oil & Gas Exploration & Production ETF IEO, Invesco Energy Exploration & Production ETF PXE and MLP ETFs like Alerian MLP ETF AMLP. AMLP ETF yields as high as 7.44% annually. If the Iran conflicts end soon, these ETFs may fall, but not to the pre-war level.
Boost Your Portfolio with Our Top ETF Insights
Zacks' exclusive Fund Newsletter delivers actionable information, top news and analysis, as well as top-performing ETFs, straight to your inbox every week.
Don’t miss out on this valuable resource. It’s free!
Get it now >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
State Street Energy Select Sector SPDR ETF (XLE): ETF Research Reports
Alerian MLP ETF (AMLP): ETF Research Reports
iShares U.S. Oil & Gas Exploration & Production ETF (IEO): ETF Research Reports
Invesco Energy Exploration & Production ETF (PXE): ETF Research Reports
This article originally published on Zacks Investment Research (zacks.com).