Making Moves in 2 Energy Names After New Questions in Iran-Israel Conflict
War between Israel and Iran is the last thing the market needed.
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It has been a great run for equities since the NASDAQ briefly went into official bear market territory in the first parts of April.
Equities have rallied strongly even as there has been only sporadic progress to date on the tariff and trade front. Recent inflation readings have been encouraging as well with some realistic hopes that the federal funds rate would start to be cut again by the end of summer.
Unfortunately, a war in the Middle East puts the markets in jeopardy depending on how this conflict works out in the next few days and weeks. The escalating violence brings new worries that investors will need to incorporate into their decisioning process. Obviously, there are a host of unknowns that these events bring with them.
Such as: In which direction is this conflict headed? Will both parties continue to hit each other’s energy infrastructure? How long will the spike in oil last? Did the Israeli strikes significantly curtail Iran’s nuclear abilities or just damage them? Will the new administration be dragged into another war of choice in the Middle East that has bedeviled administrations from both parties for generations? Will the Straits of Hormuz be choked off?
If oil prices continue to rise, this will be a headwind for both inflation and economic growth. The surge in oil prices was hardly unexpected on Friday after the initial strikes. What was interesting was that there was none of the usual "flight to quality" into U.S. treasuries that historically has occurred when these types of events have played out in the past. Perhaps that's another sign that the markets have less faith that the U.S. can continue to run huge fiscal deficits as it has in recent years without significant consequences?
I will also be interested to see if there are any divergences between the U.S. and European markets if this conflict carries on throughout the week. European bourses have outperformed their U.S. counterparts here in 2025. However, Europe is also much more dependent on energy supplies flowing from the Middle East.
Some 60% of Europe’s energy needs are fulfilled outside the continent. This dependence has grown since the Ukraine war began in early 2022, thanks to sanctions on Russian energy sources. In addition, if the conflict triggers major instability in Iran, the continent will bear the brunt of any influx of refugees. Much as it did from the instability over the years in Syria and Afghanistan.
Continued conflict in the region would boost defense stocks that already had plenty of tailwinds before this latest regional dust up. Ending on a brighter note to begin the trading week, at the moment I don’t expect this latest violence to result in a larger or sustained regional conflict. Maybe I am being naïve on this front, but I view the longer-term interests of the U.S., Iran and Israel not being served by a larger war.
Therefore, my stance on the overall market is one of the same caution outlook due to valuation levels as it was before late last week. I do plan to roll over some of the covered call positions I have in energy names like Occidental Petroleum Corporation OXY and EOG Resources, Inc. EOG that are coming up on their option expirations and whose stocks have rallied strongly on this latest escalation in the Middle East. Outside of that, I am not making any moves in my portfolio. This is obviously subject to change depending on how events play out in the days and weeks ahead.
At the time of publication, Jensen was long EOG and OXY.
