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By Hakan Kaya, PhD
We believe investing in politically sensitive commodities, such as oil and metals, could mitigate the potential impacts of rising geopolitical turmoil.
Iran’s direct attack on Israel opens yet another alarming chapter in the Middle East’s intricate narrative and may carry significant implications for global commodity markets.
Given recent developments, we believe overweighting politically sensitive commodities—such as oil and metals—could offer a way to mitigate the potential impacts of geopolitical turmoil on investment portfolios.
There are several ways oil flow from the region might get disrupted, starting with the Biden Administration deciding it can no longer turn a blind eye toward Iranian barrels that, while currently sanctioned, are increasingly hitting the market. Biden has had plenty of reason to back off—inflation still isn’t tamed; it’s an election year; and Russia could capitalize on spiking oil prices if Iranian exports are hampered—but the recent attack could force his hand.
Then there’s potential clogging in the Strait of Hormuz, through which 22 million barrels a day (20% of the globe’s oil) now flows. If Israel escalates the conflict, Iran and/or its proxies (such as the Houthis in Yemen) could try to block the flow of oil and other goods through the Strait. This could hurt Iran’s adversaries while dampening global economic activity; meanwhile, higher oil prices would help Russia and Iran itself.
U.S. strategic petroleum reserves (while at diminished levels) and OPEC’s spare capacity could mitigate prolonged price spikes. However, should conflict in the Middle East continue to ratchet, we think it is conceivable that oil prices could surge past $100 a barrel, putting pressure on global economies.
Meanwhile, the commodities market is also contending with recent sanctions by the U.S. and the United Kingdom on metals coming from Russia. We believe these sanctions—designed to limit the amount of Russian aluminium, nickel and copper in Western markets after April 13, 2024—could lead to a resurgence of backwardation (in which spot prices are higher than forward prices). The London Metal Exchange has already responded by categorizing Russian metal based on production dates and rendering post-sanction metal non-deliverable.
In our view, the threat of further Iran-Israel escalation combined with sanctions on Russian metals underscores the critical need for diversification into geopolitically sensitive commodities.
Specifically, we think investing in commodities such as oil, aluminium, nickel, copper and gold (which has recently been pricing in mounting geopolitical risk) could offer not only a hedge against inflationary pressures but also act as a vital safeguard against supply fragilities that could undermine traditional assets like stocks and bonds.
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