What Next?
After President Trump unprecedented decision to take out the balance of the Iranian Atomic enrichment infrastructure the World waits for what’s next.
I will go into this more in Wednesday’s column but suffice it to say, this action was a game changer in so many ways and I am sure we really won’t know the full extent of what actually has changed.
In regards to oil and shipping in the Straits of Hormuz I would say that is a toss up as to what the Iranians will do.
Any sort of action in the Gulf will impact Iran’s oil shipments as well and that has some troubling consequences.
I am no geopolitical guru here but I think that the Iranians, while they want to retaliate, they are going to take their time and pick their response carefully and no matter what, for the time being, oil prices will rise.
Yes, some of the rise is speculative but most of it right now is because the risks in the Middle East have risen dramatically. Insurance costs alone must have doubled over the last few weeks and now with this, they will skyrocket.
Generally, geopolitical moves don’t last all that long and this will be like most other events on the World stage. A big hoopla, fear around the globe and then the reality will set in.
Will the Iranian response lead to a bigger broader situation? Probably, but the length of that situation will be short lived and I believe by the middle of the summer, oil prices and the World’s economies will get back to whatever it is they are doing.
Oil at 76 dollars a barrel is not all that game changing so I think a lot of the fears around this massive spike in oil prices will be unrealized.
Remember several key parts of the oil market.
One. If the demand is soft, which it is becoming, oil prices will not be able to sustain a speculative situation. That situation will happen when oil breaks through the 80-82 dollar a barrel range. Anything under that is still balanced by supply/demand economics.
Two. Should the oil market sustain a 75-78 dollar range, a lot of shuttered wells will come back online, increasing supply and again, moderating pricing. The oil fields in Alberta Canada become profitable at around 72-75 dollars a barrel. That is a lot of oil that, while it may not find it’s way east, it will find it’s way west and off to the Pacific rim. Again, easing the strain on the Middle East.
Three. We can discount and discard the Saudis but rest assured they may enjoy a price spike but if they can’t get their oil through the Persian Gulf, they will not be happy campers and when the Saudis are unhappy, Iran pays in ways that the Americans won’t and the Israelis can but may be running low on ordinance.
Even though it is more of a political point, the Chinese are watching very very closely to the developments. They are in touch with the regime and letting them know that the arms that they have been supplying for the cheap oil they need, may stop. You have to figure that this particular trade is in the multiple billions of dollars and while that may be a blip on the Chinese radar, their version of the military industrial complex will take a hit.
One thing to watch in the coming days is the Forex market. Any unusual signs of dollar dumping or buying up of dollars or Euro’s signals the Chinese are involved and converting reserves to hard currency to buy oil on the open market.
Given the depth of this US involvement, there will be a lot of moving parts economically and whenever we see something like this, the tendency is to stay away. Let the events play out, let the markets do what they will do and come back in a week or two and recalculate what you want to do.
Again, I don’t think this will be the beginning of World War 3. The proxies are not proxying anymore and the funding has dissapeared. The other key playes are on the sideline and this one bold stroke may have done more for World peace than anyone on CNN is admitting.
I will expand on that on Wednesday.