Drain the swamp is a popular Trumpian term these days and can be appropriated for the President’s abrogation of the Nuclear Arms “agreement” this week with Iran. The endgame we suspect is a military confrontation that will enfeeble the rogue nation. For now step one is ever tighter sanctions by the US. A military strike against Iran appears to be a fait accompli, even though Europe will bend over backwards to assist Iran in bypassing US sanctions and keep the Nuclear deal alive. However, Iran can’t help but play into Trump’s entrapment scheme when Iranian proxies in Lebanon and Yemen fire rockets into Israel and Saudi Arabia. This will be the excuse to unleash preordained counter strikes by Israel and eventually the US to financially cripple Iran’s military adventurism.
Until Trump came along Iran had its way, capitalizing on the Saudi led Oil price hikes with plans to boost production to 4.7 Million barrels a day. Immediate US sanctions will now make any production increases very challenging. When US/Israeli missiles begin striking inside Iran for the first time in history, Oil production will fall sharply and prices will rocket higher. European attempts to keep the money flooding into Iran may be valiant, but Trump does not like to lose. Without fear of any major power countering his actions and hard-line resistance in Iran, it seems certain Trump will keep his campaign promise to weaken Iranian influence.
The strong $14 rally in Oil since February should have been good news for our readers given our steady Bullish forecasts on Oil prices. On Jan 12, 2018 (https://execspec.net/2018-oil-peaking-inventory/) we wrote “ … buy the Q1 2018 dips… As we mentioned a year ago, we expect Trump to ratchet up pressure on Iran until there is an abrogation of the Iran Nuclear deal and this will lead to higher Oil Prices. … Our Bullish September 2017 outlook to Buy the dips in Q4 2017 and Q1 2018 remains in place until at least May. Until then, selling the rallies entails greater price risk than buying the $3+ dips.” Our charts targeted the upper $60’s to low $70’s on Oil. There have been several $3 dips to purchase Oil assets as advised.
In spite of the overbought exposure by Hedge Funds that normally lead to an Oil price correction, our Bullish Oil outlook over the past year has now been extended so long as the US and Israel so clearly convey a relentless pressure campaign until Iran is humbled. The US knows Iran will continue firing missiles at US allies and will not acquiesce to unfettered inspections, thus there is no reason for the US to cease sanctions and potentially devastating military strikes that are coming. A new higher base price for Oil has now been established in the $60’s. Near term targets in the $73 to $75 area may hold until the US and Israel train their debilitating firepower upon Iranian soil. In that event we would expect Oil well into the $80’s and potentially near $100/barrel. With many OPEC members in an uncontrollable production decline spiral it will be the US primarily along with Russia and the Saudis that benefit most. I said n 2016 that the Saudis were handing the US a gift by restricting production. Should Iranian Oil be removed from the supply chain, it will take a long time for swing producers to pick up the slack.
Oil is often well correlated with the stock market (see chart above) and inversely with the US Dollar. For now they can all move up in unison with capital flight as risk assets are sold.
While many of our tech stocks for 2018 have strong net gains, major US stock indices are still a sizable 6 to 8% off their record January highs. There are several milestones we have been waiting for that could send stocks back to new highs. (1) The aggressive ring-fencing of Iran. (2) An historic denuclearized North Korea Treaty. (3) Global Trade agreements with Europe and Mexico, with China as the grand prize. A “declared” win on the Trade front is the most important of the three events, which would send stocks sharply higher as business anxiety relaxes. Victories here greatly enhance the odds of the beleaguered GOP retaining control of Congress and preventing political paralysis. Our desire for a more industrial portfolio beyond tech may soon get a significant boost when we secure a trade deal with China. Along with Tech and industrial, we will temporarily see a continued tailwind for US energy stocks that are already jumping back to their January highs. Oil related stocks and ETF’s will soar much higher when Iranian sites are bombed.