How Will Oil Stocks Perform if the Iran Conflict Drags On? Here's What History Says.

On Feb. 28, joint forces between the U.S. and Israel launched Operation Epic Fury – a coordinated strike against Iran. Since this military campaign started, the S&P 500 (^GSPC 0.61%) has dropped as low as 2% but is now virtually breakeven as of mid-day trading on March 10.

While investors will likely approach the broader stock market with heightened caution for the time being, perhaps no other sector is under more scrutiny than the energy industry right now. Considering Iran is a major producer of oil, it’s natural to wonder how oil explorers and refiners will navigate this conflict.

Let’s explore how the Iran conflict could impact the global oil market as Operation Epic Fury continues to play out. From there, I’ll draw on a number of similar historical events to help investors understand how major geopolitical narratives impact both the stock market and oil stocks in particular.

President Donald J. Trump and Secretary of State Marco Rubio oversee Operation Epic Fury. Image source: White House photo by Daniel Torok.

How the Strait of Hormuz impacts global oil supply

As a member of OPEC, Iran plays a central role in global oil dynamics. Before the current conflict started in the region, Iran produced around 3.5 million barrels of oil per day. China is by far Iran’s largest consumer of oil, with other Middle Eastern nations such as Syria and the United Arab Emirates (UAE) accounting for a smaller portion of the country’s exports.

The conflict in Iran could impact oil production in two ways. First, Iran’s oil production could fall by way of sanctions and infrastructure damage to its refineries. Moreover, trade routes – particularly in the Strait of Hormuz – could be impacted. This narrow channel is responsible for the transfer of 20 million barrels of oil per day – or roughly 20% of global oil transit.

The main theme here is that the Iran conflict has caused a global supply shock for Brent crude as buyers are forced to turn to alternative regions for oil. As a result, the conflict in Iran may fuel energy-driven inflation and send oil and gas prices soaring.

Are oil stocks a good investment during the Iran conflict?

If the Iran conflict drags on, it’s likely that oil stocks will produce uneven returns. For example, upstream oil producers with geographically diversified assets may benefit from higher profit margins for the time being. However, sustained instability from war could lead to recession risk – diminishing demand and eroding earnings growth.

While uncertainty lingers, history shows the broader S&P 500 index has proven resilient – especially during oil crises in the Middle East.

Data source: Carson Investment Research.

While regional conflicts often results in short-term dips, the data above illustrates that stocks tend to weather the storm. This underscores the idea that the broader stock market adapts – recovering once geopolitical disruptions are contained.

One important caveat to make, however, is that the situation in Iran has drawn broader tensions from other regions in the Middle East – making it increasingly difficult to know how big this war could become or how long it may last.

Given the severity of the current situation, I think there is outsized uncertainty as it relates to investing in oil stocks compared to historical events. To me, the prudent action is to leave investing in the oil markets to day traders seeking to profit from short-term volatility in the energy sector for the time being.