How to profit from the biggest oil shock ever
From Justin Spittler, Editor, Casey Daily Dispatch:
Justin’s note: “Some very troubling events are playing out in the Middle East, and the chances of a big Middle East war are greater now than they’ve been in over 45 years.”
The Casey Report and Crisis Investing editor Nick Giambruno told his readers this recently. Nick explained why a potential conflict in the Middle East could trigger a huge oil shock. This is when there’s a major disruption in global oil supply that causes the price of oil to skyrocket.
In today’s interview, Nick shows why this is likely to happen. He also reveals how everyday investors can flip this crisis into big profits…
Justin: Why do you think we’re on the verge of another major oil shock?
Nick Giambruno: The short answer is that there is the potential for a large regional war in the Middle East. There hasn’t been a large one since the oil shocks back in the ’70s.
One reason I think this is because of the time I spent living in the Middle East. I spent over two years living there, mostly in Lebanon and Beirut. But I also spent some time in Dubai. And one of the things you quickly discover living in Lebanon is that it’s a cornucopia of different religions and ethnicities. It’s really a mix of a lot of different Middle Eastern groups.
You understand this if you spend enough time there. You also start to grasp the politics and the dynamics of the region as a whole. Again, this is because all these different groups are represented in Lebanon.
So, I spent enough time there to really understand how the region works. And right now, it’s clear to me that there’s potential for a major war in the Middle East.
That doesn’t mean that I’m cheering for war—I’m certainly not. But the chances of this happening are high, and that has major investment implications.
Justin: What makes you think that?
Nick: Well, let’s take one step back and look at the geopolitics of the situation. There are really two geopolitical teams competing for power and influence in the Middle East. You have the U.S. side, which includes Israel, Saudi Arabia and a few other countries. Then you have the Russian and Iranian side, which also includes Hezbollah, a militia based in Lebanon. It’s the most powerful guerilla army in the world.
The momentum in the Middle East has turned in Iran’s favor. And the U.S., Israel, and Saudi Arabia find this intolerable, and will likely act to try and reverse this trend.
One of the main reasons for this is the failure of the U.S., Israel, and Saudi Arabia to overthrow Iran’s ally Bashar al-Assad in Syria. They mainly used indirect means with funding various rebel groups, proxies, and so forth. But that didn’t work.
We’re seven years into the war in Syria and Bashar al-Assad is not going anywhere. He’s been massively fortified by the Russians and Iranians.
The situation in Syria—among other factors—has upset the fundamental balance of power in the Middle East. And that’s why the situation is so unstable. There’s really no way for the U.S., Israel, and Saudi Arabia to reverse this trend other than a big war, which they have not been shy at hinting it.
The possibility that a major regional conflict could break out soon is higher now than it has been in decades.
Blood has already been drawn. Israel and Iran have been trading fire in Syria, and dozens of Iranian and Syrian soldiers have been killed. It seems it’s only a matter of time before it escalates into something much larger.
Justin: What exactly would this mean for the oil market? Are you predicting a major supply-side shock?
Nick: I think that’s a real possibility… There are plenty of historical examples of how Middle East troubles cause oil supply shocks and price spikes. You can look at the first oil shock in the early 1970s, which was caused by a war in the Middle East. The price of oil quadrupled. It was around $3 and it ended up at $12. It doesn’t sound like a lot, but the price quadrupled. That would be like the price of oil going to around $300 in today’s terms.
This created major problems. It led to huge lines at gas stations all around the country.
Then there was the second oil shock which happened during the Iranian revolution in 1979. The oil price shot up. When Saddam Hussein’s Iraq invaded Kuwait in the early ’90s, you saw the oil price shoot up over 70%.
So, there’s a clear pattern here. When there’s a big conflict in the Middle East, the price of oil goes up. And that’s not surprising because a large portion of global oil exports comes from the Middle East.
When there’s conflict in that area, it causes supply disruptions.
Justin: Where exactly do you think this coming supply shock will begin?
Nick: I think the “Third Oil Shock” will almost certainly focus on Iran. And I say this because of Iran’s position relative to the Strait of Hormuz. This is the most strategic waterway in the world.
Justin: Why’s it such a critical chokepoint for the global oil supply?
Nick: So, you have a lot of countries in the Persian Gulf that produce a lot of oil. There’s Saudi Arabia, Kuwait, Iraq, the United Arab Emirates, and Iran itself. These are all major oil producers. And they all move oil through the Strait of Hormuz.
In fact, about 35% of the world’s seaborne oil exports goes through this narrow passageway every day. And if you look at a map, Iran has a dominant position over this little area.
Iran has clearly stated that it would block this waterway in the case of war. And given the fundamental changes in the balance of power in the Middle East, a U.S., Israel, and Saudi war on Iran has a good chance of happening in the not-so-distant future.
Even the Pentagon admits that Iran has the capability to block the Strait of Hormuz for at least a month before there’s anything anyone can do about it. The U.S. military has done many war games to reach that conclusion.
Justin: And how exactly might the Iranians do this?
Nick: The Iranians aren’t fools. They’re fully aware their military is inferior to the United States’. That’s why they’ve become experts in asymmetrical and guerilla warfare techniques to level the playing field.
They would do all sorts of things to sabotage this very narrow water strait, including sea mines. They have swarm attack boats by the hundreds. They have advanced anti-ship ballistic missiles. They have miniature submarines that are very hard to detect, and an assortment of other unconventional tactics.
If there is a war with Iran, expect them to block the Strait of Hormuz. That will give the world a third oil shock, one that’s likely to be much more severe than the first two.
Even if there is just a hint of an increased possibility of war with Iran, expect it to cause jitters in the oil market and the price of oil to rise, too.
Justin: How does the rise of the U.S. as a major oil producer play into all this? As you know, the U.S. is now the world’s biggest, or second-biggest, oil producer, depending on your source. Does this diminish the likelihood of a major oil supply shock?
Nick: The shale revolution is a great thing for the U.S., but it’s not going to cancel out the effect of closing the Strait of Hormuz. The oil market is global. Much of the oil that passes through the Strait goes to hungry markets in China and the rest of Asia. And remember, China has now officially surpassed the U.S. as the world’s top oil importer.
Justin: Got it. So how should investors be playing this situation?
Nick: I would say you want to own the highest-quality oil stocks. I’m talking about companies that have been through turbulent times in the past. You should also look for companies that aren’t heavily exposed to trouble in the Strait of Hormuz and the Middle East.
Justin: Thanks for talking to us today, Nick.
Justin’s note: Nick recently told his Casey Report subscribers about an elite company in the oil industry set to soar along with the price of oil. He thinks it’s poised for big gains… even if tensions in the Middle East cool down.
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