Wall Street Analysts: Citrini's Comprehensive Field Report on the Strait of Hormuz

In our January macro memo, we began focusing on escalating geopolitical tensions following the Fordow operation. What we did then—and what we are attempting now—is to identify trades that offer upside potential regardless of the specific outcome of any given conflict. We selected a basket of crude and product tankers and significantly overweighted the Breakwave Tanker Shipping ETF (BWETUS), which tracks tanker freight futures. A more intriguing trading opportunity exists in the tanker space—one supported by multiple non-Iran-related tailwinds. Its structural setup is more compelling than mere geopolitical博弈. Several factors are converging here: record volumes of Iranian crude stockpiled on tankers, an aging global fleet, tightening Western sanctions on shadow shipping, and the VLCC (very large crude carrier) market already trading at multi-year highs. We believe the tanker sector has not yet peaked. Under nearly all scenarios, we see freight rates remaining elevated. Even if the Strait of Hormuz were to reopen fully tomorrow, tanker operators could continue earning substantial daily profits. That said, it is undeniable that as these assets gain momentum—BWET has already quadrupled—volatility will intensify, and in the short term, their price action will decouple from long-term fundamentals and instead track headline news. This is why we created an expanded version of our 'Iran Conflict Beta' basket, which we have already shared with subscribers in our chat room. Its objective remains consistent with our earlier approach: to construct a portfolio capable of delivering sustained returns even if the conflict resolves tomorrow—by modeling outcomes based on infrastructure damage that has already occurred. From most of our conversations, it is clear that damage to petroleum refining and natural gas processing infrastructure has been severe—and severely underestimated. Moreover, the current tightness in the refined products market significantly exceeds that in the crude oil market—hence this portfolio’s overweighting of refiners and refined-products-related assets. However, with transportation reopening, we expect near-term crude oil prices to decline. Among these sectors, we still view the U.S. petrochemical industry as offering the most asymmetric opportunity. We lack sufficient confidence to forecast short-term U.S. equity market movements, as they depend on far more than just the conflict’s outcome. Historically, outcomes have exhibited highly dispersed distributions. If our assumption about continued growth in Strait traffic flow proves incorrect—and if flows stall or effectively shut down by mid-to-late April—global equities would likely plunge sharply (by roughly 15–20%). Our base case remains that, as the conflict escalates and persists, equity markets will continue experiencing sharp volatility—but concerns over a global energy crisis will gradually give way to a more nuanced view: namely, that Strait traffic will increase, accompanied by elevated—but not catastrophic—prices. Damage to Gulf-region petrochemical infrastructure has already imposed a structural impact on this market, and we believe it may now be approaching a potential cyclical inflection point—making it arguably the most asymmetric position available. U.S. petrochemical companies with reliable access to low-cost domestic feedstocks stand to benefit enormously from global supply dislocations and soaring prices.

How do stock prices fluctuate?

First, suppose there is a publicly listed company whose fair market capitalization lies between RMB 10 billion and RMB 20 billion. When its market cap falls below RMB 10 billion, it is considered severely undervalued; when it rises above RMB 20 billion, it is deemed severely overvalued. When the market goes into frenzy and the company’s market cap drops below RMB 10 billion, you’ll notice many value investors begin entering positions. As the market cap falls further—to below RMB 8 billion—even more value investors step in. Then, if the price plunges below RMB 5 billion (don’t dismiss this as implausible—the market can indeed go this wild), yet another wave of value investors enters. Meanwhile, those early value investors who bought below RMB 10 billion hold firmly; only the less-convicted ones sell and exit. Gradually, due to the presence of value investors, buying pressure strengthens while selling pressure weakens, and the volume of floating shares (i.e., shares held by speculative or uncertain holders) dwindles. The stock price then stabilizes and begins to rebound. During this recovery phase—as long as the market cap remains below RMB 10 billion—additional value investors continue entering. At this stage, some trend-following and technical traders also join in, drawn by signs of price stabilization and rebound—or by other technical signals. Next, the company’s market cap rises steadily amid volatility. Many technical traders take profits and exit—or reduce positions—after one leg up. As the market cap approaches RMB 10 billion, a fresh wave of profit-takers flees. Even though the overall price trend remains upward, many technical analysts still lose money amid the oscillations—buying high and selling low. Don’t laugh: this is genuinely common. Many investors buy out of fear of missing out on further gains, or sell out of fear of missing the chance to exit before a drop. Others wait for a dip to buy or a rally to sell—holding positions without any coherent logic, guided solely by emotion and ambiguous, low-probability technical indicators. Countless investors lose money even during market upswings precisely because they don’t know the company’s intrinsic value—and repeatedly stop out or take profits based on fleeting technical signals or short-term price movements. Since short-term price action is inherently unpredictable, many end up losing money in bull markets, losing even more in bear markets—or making small gains in bull markets but suffering large losses in bear markets.

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