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August
03
2019

War With Iran Could Trigger the Next Oil Shock
Nick Giambruno

Today, the chances of a war with Iran are higher than ever…

And if it does happen, it will have tremendous consequences for the price of oil.

You see, about a year ago, I warned readers of my newsletter, The Casey Report, that the next big war in the Middle East was coming. And I showed them why it would focus on Iran.

The momentum in the Middle East has turned in favor of Iran. It won’t surrender its strategic gains. It’s unthinkable.

But the U.S. finds an empowered Iran intolerable. And it isn’t going to sit back and do nothing, either.

That’s why the possibility of a major regional conflict… which would be a catalyst for oil… is so high right now.

Let me explain…

Tensions Flaring

First, you should understand how this all started… and why it’s all happening around a key waterway in the Middle East named the Strait of Hormuz.

Things have been heating up around the Strait. Six oil tankers were attacked near the Strait and the Persian Gulf, and the U.S. government blamed Iran.

Iran then shot down a $120 million U.S. drone. It claims the drone was flying in its airspace.

In response, Trump approved airstrikes against Iranian targets. It would have started a full-scale war… but Trump pulled back at the last minute.

And those are just a few of the skirmishes that are now making headlines. In short, tensions between the U.S. and Iran are flaring.

But Iran holds a powerful card… because it controls the Strait.

Oil’s Most Important Chokepoint

The Strait is a narrow strip of water that links the Persian Gulf to the rest of the world. It’s the most important oil chokepoint in the world.

Five of the world’s top 10 oil-producing countries – Saudi Arabia, Iran, Iraq, the United Arab Emirates, and Kuwait – border the Persian Gulf. The Strait of Hormuz is their only sea route to the open ocean… and world markets.

Every day, nearly 19 million barrels of oil pass through the Strait of Hormuz. That translates into roughly 33% of the world’s oil traded by sea. It’s over $1.2 billion in value every single day.

That’s part of the reason why big Middle East wars are often catastrophic for global oil supplies. After all, almost 40% of global oil exports comes from the Middle East. Take a look:

As you can see, shutting down the Strait is Iran’s most powerful option in this conflict. And the investment implications are huge…

The Next Oil Shock

If Iran shuts down the Strait of Hormuz, it would cause the largest oil supply shock the world has ever seen. Take a look:

A “price shock” is when the price of something rises so quickly that businesses cannot react. Two classic examples are the First and Second Oil Shocks.

The First Oil Shock happened in 1973.

A regional war in the Middle East caused the price of oil to nearly triple. It triggered a massive gas shortage in the U.S.… and a lot of panic.

Drivers sat in lines stretching for blocks, waiting to fill up their gas tanks. Some gas stations closed. Others operated by appointment only. Rationing was introduced.

The Second Oil Shock came in 1979. Crude prices nearly tripled again… also caused by conflict in the Middle East.

You can see what happened to the oil price during both oil shocks in the next chart.

I would expect the Third Oil Shock’s effect on the oil price to be at least as severe as the first two shocks. Recall that oil prices nearly tripled.

In today’s prices, that would likely mean oil shooting above $200 a barrel…

A Golden Opportunity

However, the market doesn’t appreciate how close we are to a war yet. The oil price has barely moved, despite the imminent danger to supplies.

We haven’t returned to pre-2014 levels yet, let alone pre-2009 ones. And this distortion in the market is handing us a golden opportunity.

In this environment, you want to own the highest-quality oil stocks. That means two things:

1) Companies that have done well during turbulent times in the past.

2) Companies that aren’t heavily exposed to trouble in the Middle East.

As Middle East supply disruptions cause oil prices to skyrocket around the world, companies that fulfill these criteria will be your ticket to profits.

So if you haven’t yet, now’s the time to get in.

Regards,

Nick Giambruno
Chief Analyst, The Casey Report

P.S. In my Casey Report advisory, we have four of the world’s top oil companies in our model portfolio.

Buying these names is the best way to play the unfolding crisis with Iran. They check both boxes above… They’ve all weathered rough times in the industry, and they have minimal to nonexistent exposure in the Middle East.

If you’re a Casey Report subscriber, you can read about them in the latest issue right here. If you’re not a subscriber yet, go here to lock in your subscription today.

Nick is Doug Casey’s globetrotting companion and is the Senior Editor of Casey Research's International Man.

He writes about economics, offshore banking, second passports, surviving a financial collapse, foreign trusts and companies, geopolitics, and value investing in crisis markets, among other topics. He is also the Senior Analyst of the Crisis Investing publication. 

In short, Nick's work helps people make the most of their personal freedom and financial opportunity around the world. 

He’s lived in Europe and worked in the Middle East, most recently in Beirut and Dubai, where he covered regional banks and other companies for an investment house. Nick is a CFA charterholder and holds a bachelor’s degree in finance, summa cum laude.

Nick is a frequent speaker at investment conferences around the world. 

 

www.internationalman.com