Home > Expect $200 Oil Prices & $6 At The Pump as Iran Is Now A Full-Blown Crisis (USO, XLE, XOM, CVX, DVN, COP)
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Expect $200 Oil Prices & $6 At The Pump as Iran Is Now A Full-Blown Crisis (USO, XLE, XOM, CVX, DVN, COP)

February 8th, 2012

Kent Moors: Just when it looked like we could take a breather from the Strait of Hormuz, all attention is back on Iran.

There are three reasons for this -  all happening within the last week:

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  1. First was Tehran’s successful launch of a satellite, viewed by all in the region as being for military intelligence.
  2. Second, in his toughest talk to date, Iranian Supreme Leader Ayatollah Ali Khamenei voiced defiance to Western sanctions and pledged open retaliation if they are instituted.
  3. Finally, last Thursday, U.S. Secretary of Defense Leon Panetta expressed concern that, if matters continue, Israel could attempt an air-strike takeout of Iranian nuclear facilities within a month. Iran has been frantically moving essential components of its nuclear program underground to withstand such an attack.

All of this is, once again, leading to a rise in crude oil prices (NYSEArca:USO).

What’s more, the EU decision to stop importing Iranian crude starting July 1 will cripple any chance Tehran has to combat escalating economic and political turmoil at home.

Yet Khamenei’s defiant tone during his Friday prayer meeting speech indicates that Iran’s religious leadership will not wait for the system to unravel.

And that is what makes this both a full-blown and an intensifying crisis.

Brinksmanship in the Straits of Hormuz

So what’s being done?

Washington has little – leverage,  save its ability to temper an immediate escalation by Israel (leverage the U.S. can still apply, at least for the moment). It also has some indirect influence  on what the E.U. does.

Meanwhile, Saudi Arabia also is a  wild card. It will not tolerate a nuclear Iran.

And yes, there are ample indications that American and Israeli intelligence have concluded Iran will achieve the ability to develop nuclear weapons in the next 18 to 24 months.

Some elements of that process will be available earlier, but remember: A weapon is of little value unless it can be controlled and delivered. The logistical and infrastructure considerations need  to be in place first.

Yet with such an inevitable conclusion staring them in the face, the West has decided to embark on a risky  path…

The target here is not the nuclear project at all (over which there is less and less outside control). Instead, it has become about creating massive domestic instability to bring down a  regime.

Now, this is not about ending the theocracy. With or without Mahmoud Ahmadinejad as president or Ali Khamenei as supreme leader, Iran will remain a Shiite-dominated country. Religion decisively controls politics, and the clergy oversees the society.

The West is seeking a more moderate application of what will remain the Iranian cultural reality.

However, as the brinksmanship intensifies, so will the price of crude oil (NYSEArca:USO). Tehran, in this dangerous game of  international chicken, really only has one card to play – the Strait of Hormuz. [Related: ConocoPhillips (NYSE:COP), Exxon Mobil Corporation (NYSE:XOM), Chevron Corporation (NYSE:CVX), Devon Energy Corporation (NYSE:DVN)]

There has been much misinformation circulated about the strait. Here are the facts.

On any given day, 18% to 20% of the world’s crude oil passes through it.

According to the Energy Information Administration, the Strait’s narrowest point is 21 miles wide; however, the  width of the shipping lane in either direction is just two miles, cushioned by  another two-mile buffer zone.

Of greater significance, though, is  the fact that most of the world’s current excess capacity is Saudi. (This is the oil that can be brought to market quickly to offset unusual demand spikes  or cuts in supply elsewhere.) And, unfortunately, Saudi volume must find its  way through the same little strait.

If we’re unable to access the Saudi  excess, that loss guarantees the global market will be out of balance.  That will intensify the price upsurge – an upsurge that is already happening.

Now for the question I’m being asked several times a day in media interviews…

Just how bad can it get?

$200 Oil and $6 at the Pump

If Iran closes the Strait of Hormuz, crude oil prices will pop by between $30 and $40 a barrel… within hours.

Despite the excess storage capacity in both the U.S. and European markets and the contracts already at sea, oil traders set prices on a futures curve.

In a normal market the price is set at the expected cost of the next available barrel. During times of crisis, on the other hand, that price is determined by the cost of the most expensive next available barrel. [Related: United States Oil Fund (NYSEArca:USO), SPDR Select Sector Fund (NYSEArca:XLE)]

Should the strait remain closed for 72 hours, oil trading will push up the barrel price to $180 in New York, and closer to $200 in Europe.

Now let me put this in perspective  for you…

A $1 rise in the price of crude  translates into a 3.6-cent rise in the cost at the pump. Within the first week of the strait closure, therefore, pressures in the retail gasoline market will push the price to an average of $6 a gallon.

After one week!

There’s no doubt that this will paralyze economic recovery on both sides of the Atlantic. (Delivery costs on everything will go up, and diesel prices will rise quicker than gasoline.) This is apparently what Khamenei has threatened.

All energy options will be on the table, from alternative energy to tapping Canadian oil sands (and approving pipelines to transport it south), moving from gasoline to compressed natural gas for vehicle fuel, and a range of other possibilities.

Of course, none of these options can move quickly enough to stave off collapse.

Now, there is no guarantee any of this is going to happen. But the uncertainty is moving oil up today. And the uncertainty will remain in the market as we come closer to July 1.

That gives us some space to develop the investor’s reaction to events.

What the Iranian Crisis Means for Investors

Nothing happens until the beginning  of July on the European oil embargo, but the markets are hardly going to wait  that long.

I am off to London for meetings on  the crisis at the end of this month, followed by the annual session of the royal chartered Windsor Energy Group at the castle of the same name, and then  on to Scotland for a presentation at the U.K. Energy Policy Center. This crisis  will be the center of attention at all these get-togethers, and I will be  taking readers of Oil and Energy Investor along with me.

So how, as investors, do we respond  to this?

I think it requires a rebalancing your portfolio, as well as revising your exposure to both corporate dividends and the commodity value of oil and gas.

As we move forward, I will be  outlining some aspects of that strategy here. If you’re looking to benefit from  specific stock recommendations, please join my Energy Advantage subscribers.  To learn more about Energy  Advantage click here.

Written By Kent Moors, Ph.D. From Money Morning

Dr. Kent F. Moors is an internationally recognized expert in global risk management, oil/natural gas policy and finance, cross-border capital flows, emerging market economic and fiscal development, political, financial and market risk assessment. He is the executive managing partner of Risk Management Associates International LLP (RMAI), a full-service, global-management-consulting and executive training firm. Moors has been an advisor to the highest levels of the U.S., Russian, Kazakh, Bahamian, Iraqi and Kurdish governments, to the governors of several U.S. states, and to the premiers of two Canadian provinces. He’s served as a consultant to private companies, financial institutions and law firms in 25 countries and has appeared more than 1,400 times as a featured radio-and-television commentator in North America, Europe and Russia, appearing on ABC, BBC, Bloomberg TV, CBS, CNN, NBC, Russian RTV and regularly on Fox Business Network.

Moors is a contributing editor to the two current leading post-Soviet oil and natural gas publications (Russian Petroleum Investorand Caspian Investor), monthly digests in Middle Eastern and Eurasian market developments, as well as six previous analytical series targeting post-Soviet and emerging markets. He also directs WorldTrade Executive’s Russian and Caspian Basin Special Projects Division. The effort brings together specialists from North America, Europe, the former Soviet Union and Central Asia in an integrated electronic network allowing rapid response to global energy and financial developments.


NYSE:USO, NYSE:XLE


 

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Comments



  1. Dimatteo
    February 12th, 2012 at 07:37 | #1

    In Europe we’ve been paying $9 a gallon for petrol/’gas’ for a few years. Everyone’s doing fine, the roads are full, we just have to be careful not to buy any of those big SUV beasts that you Yanks can afford to drive.

    As for all the European hysteria I keep reading about, my brother in Germany and all his friends, as well as all my contacts in London…everything’s OK. Yes, there is a collpase happening, but it’s very slow motion and no one in daily life gives it a second thought. We just get on.

    The recession in 1990/1991 was far more devastating for me and my friends.

  2. gill
    February 9th, 2012 at 11:23 | #2

    @KING DAVID

    this is a political statement and has no place in an investing forum. investors dont care if you think your country sucks and they dont want to hear your political theories. You misunderstand basic principals of economics and really, who cares what you say. Giving the benefit of the doubt to the theocratic dictatorship while distrusting your remarkable country’s institutions is what happens when you take free speech to an extreme. I hope people like you are investing…. put your money where your beliefs are… see how far that gets you. have a nice day!

  3. Earl Richards
    February 9th, 2012 at 03:25 | #3

    Google the “Global Oil Scam” by Phil Davis. Purchase electric cars and solar panels.

  4. KING DAVID
    February 9th, 2012 at 02:48 | #4

    “And yes, there are ample indications that American and Israeli intelligence have concluded Iran will achieve the ability to develop nuclear weapons in the next 18 to 24 months”

    What kind of nonsensical gibberish is that? Moving on…
    Given the USA’s history of miscalculating a country’s WMD’s, and then misleading it’s citizens when it was certain that Iraq was NOT a threat to the USA’s national security. I’ll give Iran the benefit of the doubt. Especially considering the fact that the CIA is the real threat to LIBERTY EVERYWHERE!

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