A Potential Case For Oil
I normally avoid global affairs as I find them depressing and prefer to live a life of blissful ignorance.
I have a confession. I just got back from a small vacation deep in the snowy mountains for the last few days. My evenings were filled with binge watching documentaries with Iran and regional power struggles.
It got me thinking.
What potential risks or rewards could emerge from the next 5 years regarding Iran?
Starting off, watch the video below - it is 2 minutes long, but quite interesting.
Maybe there is method to the madness. This was roughly 25 years ago.
Painting this knowledge onto a map in red you can see the targets that he mentioned. Clustered around a single spot. The countries not painted red really are sympathetic/allies to USA/Nato.
The last target that he mentioned is still standing strong - Iran.
It feels that the Ukraine conflict is slowly flickering out of global focus and the endless middle east conflict, once again taking center stage.
Recent news coverage has been targeting Iran, primarily from the Houthis (backed by Iran) and to some degree from the rocket volleys fired into Israel.
The Case for a Rise in Oil Price
The question sits then - what would happen from an Investors point of view if Iran was attacked? There certainly are a few countries chomping at the bit to see that happen.
From my knowledge, Iran is heavily stocked with large missiles. The video below gives quite a good high level overview of their geography and munitions.
Iran would likely stop all shipping through the straight of Hormuz including LNG Gas, and perhaps disrupting 20% of the worlds Oil. A lot of the heavily producing oil states are to the left of this water body.
Not only this is, if Iran was in grave danger, there is nothing to stop them firing missiles and blowing up all of the oil refineries close by in Saudi Arabia. Detonating oil prices and taking the global economy down with it.
The chart below shows WTI Crude Futures.
We are roughly at the midpoint for the last 20 years. Reversion to mean has already occurred. Meaning there is an increased probability of moving away from this, as time progresses.
It is quite interesting looking at the chart actually as it seems that inflation hasn’t worked its way into oil. I can’t say that I have looked at this chart for a long time and it wasn’t as I would have expected.
I’m not quite sure why it is as flat as it is. Either we are producing more and more oil or it is mispriced.
It definitely feels that we are at a global flashpoint. You can feel the tension across the board.
Gold prices also reflect the move from risk-on to risk-off assets.
The Case for a Stagnation of Oil Price
If countries keep their calm and are civil, it makes sense in my mind that Oil prices continue to remain flat. Recessions are likely throughout the world’s developed economies as GDP grinds to a standstill.
The need for Oil would be diminished as industry goes into hibernation.
My Take
I’ve allocated a small amount to Oil in a few currencies. Not too much as it is an edge case that I do not have conviction on yet, just enough to take a hedging position.
I am currently sitting around ~3% Oil.
I am anti war and do not want any attacks on any country.
I only invest in precious metals because I've follow global affairs so closely for the past 25 years.
We are still at the closest point to World War 3 at least since 1982 and any investment other than precious metals - be it oil, crypto, stocks, or real estate - will be worthless if a World War breaks out.
Specifically to oil, the price for oil could go to the moon, and if it does, governments will simply nationalize all the oil companies by classifying them as vital to national security, and if all private investors take a haircut in the process, that's not the government's problem.
We currently are in the 4th generational cycle that brought us to the brink of World War 3. The first was the Cuban Missile Crisis (1962), Able Archer (1983), 9/11 (2001), and the Ukraine War (2023).
Every 20 or so years since the end of WW2, humanity seems to push itself right to the absolute brink of global annihilation.
No one is seriously thinking about the implications of what WW3 will look like.
If it's a global nuclear war, only 1 in every 100 people will survive globally. Meaning, if you don't have the means to outlast your family size multiplied by 100 in a disaster scenario, you will die, hard stop.
In that scenario the best investment is tangible goods and specialized skills that will allow you to provide a valuable good or service such as water, food, hygiene, medical care, defense, or non-digital knowledge preservation.
If it's a limited nuclear war, probably 1 in ever 10 people will survive, and the same logic as a global nuclear war applies.
If, more likely, WW3 becomes an asymmetric hybrid war, things will get a lot more weird in that new forms of warfare will be employed that no one has ever considered. On North America, I fully expect forces hostile to the US (including Western European nations) will resort to narco-terrorism, flooding the United States with drugs and weapons from South America through Canada, forcing the US to play their hand to deploy troops to invade Canada and secure it's ports.
In any of those scenarios, I'd expect an inversion in priorities that would see the valuation of all investments essentially being completely flipped where the most undervalued investments (such as precious metals) become extremely valuable while the investments everyone thinks are valuable now will become worthless.