U.S. Stock Market: Energy Sector Investors Await U.S. Response to Tanker Attacks

The major U.S. stock indexes closed in positive territory on Thursday after recovering from early weakness in the futures market. The catalyst behind the rally was a surge in energy stocks, which were lifted by a spike in oil prices after reports of attacks on two tankers near Iran.

Hopes for a sooner-than-expected rate cut by the Federal Reserve continued to underpin the markets, but comments from a Chinese government official may have also helped push prices higher. According to reports, Chinese Vice Premier Liu He said on Thursday that Beijing would soon announce more policies to support growth and financial-market liquidity amid rising U.S. trade pressure.

In the cash market on Thursday, the benchmark S&P 500 Index settled at 2891.64, up 11.80 or +0.42%. The blue chip Dow Jones Industrial Average closed at 26106.77, up 101.94 or +0.40% and the technology-based NASDAQ-Composite finished at 7837.13, up 44.41 or +0.58%.

Energy Sector:  Crude Prices Up, Tanker Stocks Rise

Oil prices jumped on Thursday, reversing the previous session’s weakness after two tanker ships carrying refined petroleum products were attacked in waters close to Iran. Oil company shares surged on the news, driving up the S&P 500 Energy Sector. The Energy Select Sector SPDR Fund (XLE) soared 1.2% with components Hess and Phillips 66, among the best performers with 2% gains.

While most investors will likely be watching and reacting to the highly volatile crude oil prices, smart money may actually be flowing into the shares of companies that operate tankers, at least over the short-run.

According to Transport Topics, “Shares of Frontline Ltd., whose ship Front Altair was damaged by explosions early June 13, surged as much as 11% in Oslo, Norway, the most since February. Nordic American Tankers Ltd. climbed a similar amount, while DHT Holdings gained as much as 7.1%.

“The narrative is that a conflict in the region, and a possible closure of the Strait of Hormuz, would be good for tanker rates in the short term,” said Frode Morkeda, an analyst at Clarksons Platou Securities, based in Oslo. Longer-term, the lost volumes from a closure would be a “killer to takers,” he said.

How to Play the Heightened Volatility in the Oil Sector

The price action in the oil sector is likely going to develop into a short-term, long-term situation. Firstly, the story is not about the two tankers that were attacked, it’s about the one-third of all global seaborne oil ships that travel through the Strait of Hormuz where the attacks occurred.

Secondly, the next major reaction to the situation will likely to be to the U.S. response, if any, to the event. Secretary of State Mike Pompeo blamed Iran for the “blatant assault” on the vessels and said the United States would defend itself and its allies against Iranian aggression in the region. But he provided no evidence that the explosions had been the work of Iranian forces.

Over the short-run, the incident is not likely to have much of an effect on crude oil prices so any rallies are likely to be sold due to rising concerns over a global economic slowdown and lower demand.

Furthermore, the chances of an immediate military response from the United States is slim with Pompeo saying, “Our policy remains an economic and diplomatic effort to bring Iran back to the negotiating table at the right time and encourage a comprehensive deal that addresses the broad range of threats. Iran should meet diplomacy with diplomacy, not with terror, bloodshed and extortion.”

Over the long-run a direct U.S.-Iran conflict would likely lead to the shutdown of the Strait of Hormuz. This poses a higher risk of oil-supply disruption, which could lead to sharply higher prices during the second half of the year, especially if demand picks up.