Fitch Ratings Analyst 5.0 4 ideas

Our current baseline assumption is that the closure of the strait is likely to be temporary and obviously the oil prices will be very volatile... we do expect the prices to moderate once the transits through the strait restarts and the market will go back to its fundamentals and the oil market is oversupplied. The current spike in crude prices is entirely driven by a geopolitical risk premium rather than a structural deficit. Because the physical market is actually oversupplied, the resolution or normalization of the Strait of Hormuz transit will act as a negative catalyst for oil. Fading the geopolitical spike allows investors to align with the underlying bearish fundamentals of the commodity. Short the US Oil ETF to fade the temporary geopolitical risk premium, as fundamentals point to an oversupplied market. The conflict escalates further, drawing in more regional producers, or the Strait of Hormuz closure lasts much longer than the baseline assumption, causing sustained panic buying.

G-7 finance ministers will be discussing a possible joint release of oil reserves... global observed oil inventories stood about 8.2 billion barrels... and this amount is sufficient to cover the shutdown of the oil shipments by the Strait of Hormuz for over 400 days. Energy equities have likely rallied hard on the back of Brent crude crossing the $100 threshold. However, massive global reserves and coordinated G-7 intervention will cap the upside of the underlying commodity. As oil prices moderate back to their oversupplied fundamental levels, the anticipated earnings windfall for major oil producers will evaporate. This will lead to margin compression and a pullback in broad energy sector equities. Short major energy producers and the broader energy sector ETF as the temporary geopolitical premium in their underlying product deflates. Energy companies might use the temporary cash windfall from the current price spike for massive share buybacks or special dividends, supporting their stock prices even as crude falls.