Inside Markets — Middle East Risk Defined

Markets have a history of largely ignoring geopolitical risks as these events tend to be short-lived. Market participants expect the current even will be short-lived, but things could escalate if Iran is able to successfully attack U.S. assets in the region or disrupt the distribution of oil supply. This type of development would likely result in the U.S. operation (destroy nuclear/ballistic missile capabilities) shifting to one that looks more like regime change, which could last months or even quarters.  Iran’s parliament reportedly supports closing the Strait of Hormuz, which could temporarily stop the flow of 20% of the world’s oil supply. Successfully ‘closing’ the Strait of Hormuz would take Brent to ~$120bbl but it’s hard to accomplish and would likely only be temporary. However, a spike to $120bbl for any length of time would likely take the SPX down 3-5% and test support in the 5650-5840 zone. De-escalation from here would remove the event from the list of known market risks.