Window of War Opening with Iran

When Trump offers an Olive branch saying “Let’s Make Iran Great Again”, he means “Let’s Make Iran Weak Again”, unless Iran makes a Sisyphean deal bowing to Trump’s wishes.  Even as a candidate it was clear this President would not allow Iran to dominate the Middle East, foment terror or advance its nuclear technology. We have been expecting a tightening of the noose around Iran this year with the Oil embargo and Iran has used its shrinking rope to escalate attacks on US allies, oil tankers and military assets. If Iran were to restrain itself and its proxies on the doorsteps of Saudi Arabia and Israel, then the US might hold its fire longer, but such quiescence from Iran would be most uncharacteristic. With the new moon cloaked in darkness next week (July 2nd) there will be a tempting window of opportunity for a limited US strike upon Iran. The US may wait for allies to join US shipping protection patrols in the Straits of Hormuz and patiently strangle Iran economically, but eventually all roads lead to a major conflagration as Iran will not go quietly into the night. The next Iranian inspired strike on the US and its allies is likely to be the match that lights up the Middle East. While peacetime Oil fundamentals remain Bearish, the geopolitical and seasonal factors allow for a short term surge higher this summer.

With 20 percent of the worlds Oil shipping through the waters outside of Iran who has a history of mining those waters and using swarms of missile laden boats, it’s natural to assume this conflict could be explosive for world Oil prices. However, the full impact will be muted in the US and short lived globally given our increasing energy independence and military omnipotence. The fundamentals of slowing global oil demand growth and the US adding new production of a million barrels a day each year are Bearish for Oil, but the anticipation of war will keep prices firm with the potential for short term spikes above $65. Within weeks of any military conflict with Iran, Oil prices are likely to peak as overwhelming US power should allay fears of long term closures in the Persian Gulf.

While the US Oil supply line should be secure, global anxiety remains with the narrow Straits of Hormuz shipping route by Iran supplying over 20 million barrels per day of the worlds petroleum needs. The US is cutting off virtually all Iranian Oil exports, the life blood of their economy, and has positioned its armada to protect this vital shipping lane. Iran was exporting 2.5 Million barrels per day (bpd) just over a year ago and is expected to shrink almost 90 percent to less than 300,000 bpd this month. The US is drawing its proverbial line in the sand and sea to which we expect Iran to cross.

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