An analysis of the recent TACO trade dynamics and subsequent oil price recovery is essential. From March 10th to March 13th, the market experienced a significant price drop of $30-40. This price movement was perceived as an overly dismissive assessment of Iran's capabilities and strategic position, particularly given its ongoing blockade of the Strait of Hormuz. In response, oil prices rebounded strongly in the latter part of the week, climbing from around $80 per barrel to approximately $100 per barrel.
Looking ahead, short-term oil prices may continue their upward trajectory. Building on the "Longer until Higher" thesis, the $100 per barrel price observed on Friday is still considered insufficient to reflect current fundamental drivers. The primary factors include Iran's strong incentive for elevated oil prices and the political constraints on the U.S. administration, making a swift compromise with Iran at moderate oil price levels unlikely.
Should oil prices enter a high-price, high-volatility range in the coming week, how should the situation be interpreted? While the intensity of the conflict may escalate in the short term, with expectations regarding the Red Sea blockade, oil infrastructure, and ground warfare gaining traction, the situation is expected to de-escalate over the medium term. In the near term, there are motivations for provocative actions to gain leverage in negotiations, which suggests oil prices could rise further as the market prices in a higher risk premium.
Following a potential oil price surge, how can investment opportunities be identified? From a medium-term perspective, while the ceiling for oil prices is difficult to cap, the duration of elevated prices may be limited. This is primarily due to significant political and economic constraints against a prolonged and expanded conflict. The costs, including rising oil prices, war expenditures, and diplomatic pressure from allies, are increasing, thereby reducing the incentive for continued escalation. Politically, the strategic window for certain objectives has passed, diminishing the benefits of a protracted conflict.
Therefore, after a further rise in oil prices, regardless of the conflict's intensity, market focus should shift to the possibility of successful negotiations. In a high-price, high-volatility environment, the conditions for a mutually acceptable agreement may become more favorable. This potential for a negotiated outcome could present the next market "expectation gap" to monitor and trade.
Regarding investment allocation, in the short term, as conflict intensity may rise and related expectations develop, sectors whose prices are directly correlated with and whose prospects benefit from rising oil prices are recommended. Historical analysis since 2005 shows that sectors with high positive correlation to oil prices include non-ferrous metals, coal, oil and petrochemicals, chemicals, steel, machinery, new energy, and agriculture. The beneficial logic can be categorized into three types: direct profit increases for upstream energy sectors; enhanced economics and demand for alternative energy sources like coal, gas, and biofuels; and cost-driven price increases for sectors like fertilizers and pesticides.
For the medium term, as oil prices potentially peak, it is advisable to seek sectors with independent growth dynamics that are less affected by oil price fluctuations. Recommendations include sectors supported by strong industrial trends and policies, such as Artificial Intelligence (AI) and advanced manufacturing. After initial pricing-in of geopolitical risks, these sectors, due to their resilient fundamentals, could outperform in a risky environment. Sub-sectors identified through upward earnings revisions since the start of the year are concentrated in AI (hardware and software) and advanced manufacturing (new energy, defense, machinery, and related components).
Risk factors include a continued deterioration of the situation with Iran and a sharp global spike in oil prices.