Market Overview

Are Iran Fears Totally Baseless?

There has been a lot of discussion lately about the rising threat of Iran becoming the new top enemy of the United States. Especially, the Republican presidential candidates have voiced their concerns over Iran's nuclear program and actions to shut the Strait of Hormuz, which is a main shipping route for oil. For example, Newt Gingrich recently said that "Iran is a more pressing issue than Afghanistan” and also Mitt Romney states that “the greatest danger that America faces and the world faces is a nuclear Iran.”

Also, the Obama administration has taken the Iranian threat seriously and imposed embargoes on the oil exports from the country that has been actively working on building nuclear weapons. In addition, most of the EU countries have banned the oil imports from Iran. This has led to a decline in supply, but also significantly hurt Iran's ability to distribute its most important export.

Due to the looming fears and decreased supply, the price of oil has risen above $100 per barrel and the Americans are once again paying more to fill up their gas tanks. This rise in gas prices might be temporary though. CNN's Fareed Zakaria, who is an expert in the Middle Eastern affairs, argues that instead of becoming a strong military threat, Iran is in fact weakening.

Fareed Zakaria, who hosts Global Public Square on CNN, states that “the real story on the ground is that Iran is weak and getting weaker. Sanctions have pushed the economy into a nose-dive.” He also points out that since President Obama took office, the U.S. dollar has appreciated 60 percent against the Iranian rial, which is a clear sign of the weakening economy in Iran. Lastly, Fareed Zakaria points out that the Iranian regime is very divided, which also contributes to the nation's increasing weakness.

So what does all this mean for traders who want to profit from the change in oil prices? In the short-term, supply issues and political uncertainty in Iran are likely to keep the oil price elevated. However, if it turns out that Fareed Zakaria is right and the oil embargoes have indeed weakened Iran, the country might be forced to halt its nuclear program and withdraw its troops from the Strait of Hormuz. Therefore it is possible that we will see the oil price tumble back below $100 per barrel very soon.

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ACTION ITEMS:

Bullish:
Traders who believe that the oil price will continue to go higher might want to consider the following trades:
  • Go long the United States Oil Fund ETF (NYSE: USO).
  • Go long oil companies, such as Exxon (NYSE: XOM) and Chevron (NYSE: CVX).
  • Short the airline companies that are likely to be hurt by the higher oil prices. Claymore/NYSE Arca Airline ETF (NYSE: FAA)
Bearish:
Traders who believe that the oil price is poised to fall may consider alternative positions:
  • Buy crude oil puts.
  • This would put more money in consumers' pockets. Consumer Discretionary SPDR ETF (NYSE: XLY) is one way to play this. SPDR S&P 500 ETF (NYSE: SPY).
  • Lower oil price tends to boost the overall economic activity in the U.S. Consider going long SPDR S&P 500 ETF (NYSE: SPY).
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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