Rising Middle East Tensions - Winners and Losers

Author: Gary Ashton

Estimated read time: 3 minutes

Publication date: 24th Sep 2019 10:23 GMT+1

In the latest round of increasing tensions in the Middle East, US President Trump last week announced the deployment of US defence forces to Saudi Arabia and the United Arab Emirates in response to an alleged Iranian attack on Saudi oil fields and facilities in the east of the country that sent oil prices higher for a brief period. Reassuring messages from the Kingdom that production could be restored relatively quickly along with robust supplies of crude oil inventory kept prices from spiking further. (For more see: $100 per Barrel Oil – Not So Fast).

The US strategic move to deploy troops and armour came shortly after a White House decision to increase economic sanctions on Iran, but the enhanced physical presence of US troops in the region dials up the tension on what is already an agitated situation. Even before the attack on Saudi facilities, the West accused Iran in June of sabotaging two oil tankers near the Straits of Hormuz. The straits are a significant global oil shipping chokepoint.

According to the US Energy Information Agency (EIA), in 2018, daily flow through the straits averaged 21 million barrels per day or approximately 20% of global petroleum liquids consumption.

Who Benefits …

Some immediate winners that come to mind from rising tension in the Middle East are the oilfield service companies that will have to repair any damage to restore lost production from a protracted or escalated military conflict. International players like Schlumberger N.V. (NYSE: SLB) or Halliburton Company (NYSE: HAL) are heavy hitters in this field. Retail investors may be more comfortable, however, with a diversified ETF of oilfield service companies like the VanEck Vectors Oil Services ETF (AMEX: OIH), or a diversified energy holding like the Energy Select Sector SPDR ETF (AMEX: XLE).

Other winners are oil-producing countries that are not in the Middle East - like Russia. One way to get exposure to Russian equity is with the VanEck Vectors Russia ETF (AMEX: RSX). The top five holdings in this ETF are all in the energy sector.

… and Who Pays the Price?

Losers from higher oil prices are oil consumers or oil-importing countries. Oil is mainly a transportation fuel, so higher prices are going to impact sectors like airlines or trucking negatively. One ETF that could underperform the broader market if tensions rise is the SPDR S&P Transportation ETF (AMEX: XTN). Some of the top stocks in this ETF are in the US trucking sector.

Other losers include oil-importing countries like China and Turkey. According to the EIA, China overtook the US as the world’s largest oil importer in 2017, making the country particularly vulnerable to rising oil prices. The SPDR S&P China ETF (AMEX: GXC) is down about 2.5% since the attack on Saudi oil facilities. Another country dependent on oil imports is Turkey. What makes the country particularly vulnerable is its dependence on Iranian oil. The iShares MSCI Turkey ETF (NASDAQ: TUR) has fallen about 4.5% since the Saudi incident.

Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.