I hope you don’t do a lot of driving because you’re now hostage to the whims of the oil market — and Donald Trump’s brain.
I say that because crude oil surged nearly 3% in the United States on Monday.
This came on the back of news that the United States won’t allow further exemptions around Iranian oil after the deadline for the current batch, which expires on 2 May.
That’s a million barrels of oil off the global market every day.
It’s also a lot of new money heading directly into the Treasury of Saudi Arabia. Perhaps that’s the whole point of this? I certainly don’t buy the line of the US government.
Today’s Profit Watch explores the implications…
The US government continues to isolate Iran. US Secretary of State Mike Pompeo says America wants Iranian exports to go to zero.
The way to enforce this is to block any country that doesn’t comply from America’s market and especially its banks.
The US says Iran sponsors terror and militia groups. Maybe it does. I don’t know.
But anyone with a glancing knowledge of America’s history knows the US government is prepared to deal with unsavoury characters and regimes whenever it suits.
A current case is Saudi Arabia.
Just last week, Donald Trump used the second veto of his presidency. It was to stop a bipartisan bill from the US Congress to end American involvement in the Yemeni war1.
This is a vicious conflict between Saudi Arabia and Yemeni ‘rebels’.
Amnesty International says this conflict has killed nearly 17,000 civilians. It also says any country supplying arms to the Saudi coalition is complicit in war crimes2.
Australia's Next Great Boom
If Callum Newman’s analysis is right, Australian resources are at the beginning of a comeback. This report explains Callum’s ‘case for commodities’ for this year and next. Plus, get a free subscription to Australia’s newest, most forward-looking daily investment email, Profit Watch. Enter your email address below and click ‘Send Me My FREE Report’.
Hey, I’m confused. Shouldn’t Saudi Arabia be under sanctions too? That reminds me. What happened to the outrage over the murder of Jamal Khashoggi in the Saudi consulate in Istanbul?
There’s nothing you and I can do about this. All we can do is read the tea leaves as best we can. They’re pointing to higher — much higher — oil prices.
Iranian sanctions are one thing. But we also have the collapse of Venezuela (more sanctions there too!), not to mention a warlord trampling all over Libya. Neither of these situations is likely to be resolved anytime soon.
This puts the global supply and demand balance in an extremely sensitive position. And let’s not forget perhaps the most important thing of all…
Panic hoarding to hit oil buyers?
And what is that? It’s the psychology of the market.
If major oil buyers and traders begin to worry about a possible disruption or shortage coming to the market, then they’ll start acting as if it’s already here.
They’ll begin accumulating strategic stocks now. It’s the rational thing to do — because they’ll be able to cash in on the higher prices. That could inject even more buying power into the market.
The strange thing about all this is that Trump is going hard line on Iran before the US election in 2020. That means he’s running the risk of driving up fuel prices and hurting his voter base.
Perhaps he has a way to take the lid off the pressure cooker in mind already. One way would be to release a large number of barrels from the US strategic reserve.
Or perhaps the US government is assured that Saudi Arabia, Russia and even their own oil industry can meet any shortfall in supply. Anything is possible.
However, you should be very worried which government monkey has his hand on the lever here. There is little spare capacity left in the global oil market. The price of oil could get out of hand here.
That makes now the time to be taking a strategic punt on one or two oil stocks. These won’t be ones to leave to your grandkids. They’re the kind to ride for the next 12 to 18 months while this current oil dynamic plays out.
It’s hard to see the world getting out of this without oil going over US$100 a barrel again.
Take note of everything I’ve told you about the geopolitics around oil right now. You can also add in a new environmental rule, due to come into effect in January 2020.
You might be surprised to know that something similar was part of oil’s surge to nearly US$150 a barrel in 2008.
The world practically sleepwalked into that at the time. It looks like we’re doing the same thing now.