What's Really Driving Oil Market Volatility?

Recent attacks on oil tankers in the Middle East have grabbed headlines and revived geopolitical fears. However, Fred Fromm, portfolio manager of Franklin Natural Resources Fund, says other factors, namely global oil supply-demand dynamics, are more responsible for the bouts of oil market volatility we’ve seen this year.

With the June 13 attacks on two oil tankers near the Strait of Hormuz—a vital Gulf of Oman waterway—investors may be wondering if these types of disruptions could derail the global oil market. That’s understandable considering about 40% of the world’s traded oil passes through the strait.1

In our view, it’s challenging to forecast the direction of oil prices based on the tanker attacks alone. These types of geopolitical tensions are ever-present and tend to shift in importance over time. Russia’s growing influence in the Middle East and coordination with Organization of Petroleum Exporting Countries (OPEC) is one recent example. Another is Iran’s regional influence and interplay with the United States, which has led to various proxy wars and the attacks on tankers from other countries.

As long-term investors, we’ve always had to consider a myriad of issues when analyzing the oil market. As a result, we test a range of outcomes when analyzing companies and their securities.