Mideast Mayhem: What You Need To Know About The Impact On Oil

seekingalpha04-15

Iran launched a direct attack on Israel with over 300 drones and missiles, marking a significant escalation in the conflict.Iran's attack had a 99% interception rate, with only one ballistic missile ...

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A new peak was reached when Iran launched more than 300 drones and missiles towards Israel on Saturday night. In fact, it was the first-ever Iranian direct attack on Israel. Until Saturday, the state has always used its proxies. As we can see below, Iran has proxy militias in key regions, including Yemen, Lebanon, and Gaza/Palestine. On a side note, this also explains why Yemen has increasingly pressured shipping routes in the Red Sea, as Iran is using its proxies to pressure economic supply chains. Bloomberg Going back to the attack on Saturday, the attac","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"AM":"Antero Midstream Corporation","BK4570":"地缘局势概念股","BK4144":"石油与天然气的储存和运输","CNQ.AU":"CLEAN TEQ WATER LTD","BK4585":"ETF&股票定投概念","BK7047":"环境与设施服务","DUG":"二倍做空石油与天然气ETF(ProShares)","LU1169590202.USD":"ALLSPRING (LUX)  U.S. SELECT EQUITY \"I\" (USD) ACC","BK4566":"资本集团","CNQ":"加国自然资源","LU1169589451.USD":"ALLSPRING (LUX)  U.S. SELECT EQUITY \"A\" (USD) ACC","TPL":"Texas Pacific Land Trust Sub Sha","BK4588":"碎股","LU0368265418.SGD":"Blackrock World Energy Fund A2 SGD-H","LU0300736492.USD":"FRANKLIN NATURAL RESOURCES \"A\" (USD) INC","USO":"美国原油ETF","LU0300736062.USD":"FRANKLIN NATURAL RESOURCES \"A\" (USD) ACC","LU0122376428.USD":"贝莱德世界能源基金A2","DWT":"三倍做空原油ETN","DDG":"ProShares做空石油与天然气ETF","UCO":"二倍做多彭博原油ETF","SCO":"二倍做空彭博原油指数ETF","BK4213":"石油与天然气的勘探与生产"},"translate_title":"中东大混乱：你需要知道的对石油的影响","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"TPL":1,"CNQ":1,"CNQ.AU":1,"AM":1,"CLmain":0.9,"BZmain":0.6,"USO":0.6,"UCO":0.6,"SCO":0.6,"QMmain":0.6,"DWT":0.6,"DUG":0.6,"DDG":0.6},"content_text":"Iran launched a direct attack on Israel with over 300 drones and missiles, marking a significant escalation in the conflict.Iran's attack had a 99% interception rate, with only one ballistic missile hitting its target.The attack highlights the ongoing geopolitical tensions in the Middle East and raises concerns about the impact on the global economy and oil prices.   Gerasimov174 Introduction On April 12, I wrote an article covering my entire portfolio. I started the article by explaining that I'm a \"big picture\" guy, implementing supply chains, macroeconomics, and (geo)politics into my research framework. Leo Nelissen (Investment Framework) Most of my articles are about macroeconomic developments and/or supply chains. Although politics is always a driving force, I do not often write articles focused on political developments. That's based on a number of reasons, including transparency issues. For example, while stock-listed businesses are obligated to frequently update shareholders using the latest financial numbers and business developments, politicians are in a different boat. Although I'm not making the case that business managers are always transparent, the world of geopolitics is muddy waters, as most people have no idea what is going on. It's just too complicated. After all, we can only assume what goes on in the minds of leaders like Putin who decided to invade Ukraine or how close China may be to invading Taiwan. I'm giving you two very extreme examples here, but I think readers get my point. In fact, when I started to work for a geopolitical expert with strong political ties, I stopped watching House of Cards when I found out how wild real-life politics were. With all of this in mind, this article is about one of the most important geopolitical developments at the moment: the Gaza war and its bigger implications. This conflict was just pushed to another level when Iran decided to directly attack Israel, sending hundreds of missiles and drones. As a result, this is what the New York Times frontpage looks like on the early morning of April 15: New York Times In this article, I'll give you my objective view of the situation and explain what we may expect in terms of economic and geopolitical implications, especially in light of energy markets (crude oil). So, let's get to it! What Happened? Ever since the terror attacks on Israel on October 7, the Middle East has turned into a tinderbox. A new peak was reached when Iran launched more than 300 drones and missiles towards Israel on Saturday night. In fact, it was the first-ever Iranian direct attack on Israel. Until Saturday, the state has always used its proxies. As we can see below, Iran has proxy militias in key regions, including Yemen, Lebanon, and Gaza/Palestine. On a side note, this also explains why Yemen has increasingly pressured shipping routes in the Red Sea, as Iran is using its proxies to pressure economic supply chains. Bloomberg Going back to the attack on Saturday, the attack included more than 30 cruise missiles and 120 ballistic missiles, according to The Guardian. Luckily, the advanced air defense from the Israeli Defense Forces and their allies allowed for a 99% interception rate. Only one ballistic missile got a hit. In this case, it hit the Nevatim airbase in the Negev desert. One person was seriously injured by falling shrapnel from an interception. The Wall Street Journal After the attack, Iran officially ended the operation, calling it a \"success.\" An Escalation, But No WW3 To me, the main question is why Iran would call an operation a success that achieved absolutely nothing. At least, one may assume that the goal of Iran was to do some serious damage. Right? According to sources citing Al Jazeera and IRGC, the nation even made the case it \"didn't even use its hypersonic missiles.\" My sources tell me Iran was simply bluffing. Why? That's because it does not have hypersonics that work. See, a hypersonic missile is faster than five times the speed of sound (Mach 5). The U.S. is currently working on a number of hypersonic programs as well. The problem is that during these flights, a plasma sheath is formed, which interferes with satellite communications.   Kim, Keidar, Et Al. (2008) In other words, it's possible to let missiles fly very fast. Targeting is a whole other problem. The Germans had the same problem in the Second World War. They had extremely powerful rockets like the V2 rocket. The problem was targeting. With regard to Iran, even The Wall Street Journal reported that \"roughly 50% of the ballistic missiles fired by Iran failed to launch or crashed before reaching their target.\" What we are likely dealing with here is a statement from Iran. Iran wants to let Israel know that it needs to be taken seriously and that it is not going to hesitate if it feels threatened or attacked. According to my sources, this is very similar to what Iran did in 2020. In 2020, Iran launched missiles at a military base in Iraq that housed American troops. This was a retaliation after the United States killed Qasem Soleimani, the commander of the IRGC's Quds Forces. However, they informed the U.S. before they launched these missiles. While all of this is speculation (again, we can only guess what global leaders are thinking), I have high confidence in this thesis, as the U.S. just came out and said it would not support Israel in any potential retaliation strikes against Iran. One can even make the case that Iran made a huge mistake. According to sources, the U.S. may have created a strong coalition in defense of Israel. This makes sense, as Israel got support from some \"unexpected\" partners. concluding Jordan, Saudi Arabia, and the United Arab Emirates.  “Our regional partners stepped up despite six months of very significant tension between them and Israel, and between them and the United States as they begged the United States to do something to restrain the Israelis,” said Steven Cook, a Middle East analyst at the Council on Foreign Relations. Cook said that no matter how much countries in the region may dislike Israeli Prime Minister Benjamin Netanyahu, they dislike Iran’s government more. - The Wall Street Journal  With all of this in mind, what does this mean for global geopolitics, oil prices, and the economy? The Impact On The Economy Shortly after the attack, Mohamed A. El-Erain (chief economic advisor at Allianz) wrote an article on the potential impact on the economy. He wrote the perfect paragraph as he connected elevated global geopolitical risks to ongoing economic issues. I almost highlighted the entire paragraph, as I believe it's crucial to understand the bigger picture here. [...] traders and investors will react to higher geopolitical risks whose spillover can reach far and wide in asset markets. Beyond that, they must factor in the higher threat of stagflationary winds for the global economy at a time when risk-mitigating policy tools, such as fiscal and monetary measures, are already overly stretched, and inflation in the US is proving sticky. Mr. El-Erian, who was the former CEO of the largest bond trader, PIMCO, also made the case that the global economy can handle a one-time increase in the geopolitical \"risk premium.\" However, they are not in a good spot to deal with further escalations that could create a ripple-through effect. For example, when Russia attacked Ukraine in 2021, it caused a massive ripple effect. Back then, I was covering the situation for a third-party research company. Because Russia had cut off natural gas flows to Europe, fertilizer production imploded. This resulted in lower CO2 output, which meat processors need to stun pigs before slaughter. This is just one of the many ways global supply chains work. The energy price shock that would follow such further escalations would stifle the recovery in manufacturing that is helping countries such as Germany and the UK emerge from their technical recessions. It would complicate a US inflation picture that is already subject to price increases proving more stubborn than many, including the Federal Reserve, expected. In fact, inflation in the United States has come in higher than expected for four consecutive months. Even worse, the most recent release showed an uptick, fueled by energy for the first time since 1Q23. Bloomberg This comes at a time when the picture is already very complicated, as the market hopes the Fed can cut rates soon to alleviate the pressure of high debt costs on consumers, corporations, and the government. Escalating tensions would force the market to price in potentially lower economic growth and a \"higher-for-longer\" scenario for both inflation and elevated rates. This would not be bullish, as it would come at a very bad time. The good news is that no escalation is expected. In light of what we discussed in the first part of this article, the market seems to agree that the risks of a full-blown war in the Middle East are subdued. After all, neither Iran nor Israel would benefit from it. Also, Iran likely lacks the capabilities. In order to monitor sentiment in the region, we can use oil, which brings me to the next part. It's All About Oil When I say the market does not expect an escalation, I'm referring to the price of oil. The Middle East produces more than 30 million barrels of oil each day. That's roughly a third of global output. As one can imagine, any disruption could immediately lead to higher energy inflation, which could work its way through the economy. As we can see below, oil prices were roughly unchanged when futures opened on Sunday.   Bloomberg If the market were just a little bit worried about these things getting out of hand, we can assume that oil would trade much higher. In fact, oil prices have barely moved higher since the Hamas attacks on October 7. Bloomberg On top of that, while I am writing this, the S&P 500 future is trading 50 basis points up compared to Friday's close. That said, there's more to it. The attack on Israel is just one of many events that make the job of OEPC+ in finding the right oil price so very hard. Bloomberg's energy expert Javier Blas wrote an article titled \"Iran's Attack On Israel Upsets OPEC+ Search For Goldilocks Price.\"  Essentially, this means OPEC+ is trying to find an oil price that is elevated but not so high that it causes economic distress. After all, oil companies and OPEC governments do not benefit if elevated oil prices cause a demand implosion. Given the bigger picture, Mr. Blas made a few great points that I used to add my own view on things.  Nothing has changed in the world of oil since Saturday. At least from a physical point-of-view, as the Strait of Hormuz is still open to shipping. That's the most important energy chokepoint in the world. Nonetheless, it would be naïve to suggest that everything is back to normal. While Iran made a statement, we can assume that the longer this conflict takes, the bigger the probability of an event that could disrupt global oil flows. Overall oil supply and demand fundamentals appear to be healthy. Essentially, the quote below shows why I'm a long-term oil and gas bull:  Even the most bearish forecast for oil demand suggests consumption growth in 2024 will match the historical annual average of 1.2 million barrels a day. The bullish forecasts are for much higher growth, in the 1.5-to-1.9 million barrels a day range. On the supply side, a series of glitches have reduced production this year, particularly of US shale oil. As a result, global oil inventories, which typically increase in the first half of the year, have remained unchanged. - Bloomberg  OPEC+ is keeping the market very tight. Even as Brent oil went to $90, it decided to keep output cuts in place. Moreover, the expectation that OPEC+ may ease these restrictions has not resulted in a lower oil price. Once OPEC+ increases output, it may do this on a month-to-month basis, leaving enough room for quick adjustments in case oil prices fall again. Even a full-blown war with Iran would not necessarily have to lead to an oil price explosion.  According to Javier Blas, OPEC+ has 5 million barrels of oil per day in spare capacity. That is 5% of global demand and more than Iran's total production. Bloomberg In general, this means OPEC+ has the tools to keep oil from exploding higher once it starts to trade in the triple-digit dollar range. Biden is not interested in a bigger conflict. Not only is a large war bad for all parties involved, but he is also up for re-election in November. Any price shocks could hurt him in the polls, which already show a very tight race between him and former President Trump. 270ToWin Hence, going back to Bloomberg, under Biden, Iran's oil output has reached a five-year high, reaching 3.25 million barrels per day this year. If Biden decides to tighten sanctions, it could tighten the oil market (assuming OPEC+ does not step in).  Then there's Russia. This geopolitical puzzle is nothing without Russia. Any oil price increases benefit Russia, which is currently selling its crude at $75 per barrel. That's much higher than the $60 price cap that was \"implemented\" after the start of the Ukraine war. Hence, any new sanctions on Iran would help Russia boost its finances to pressure East Europe. Biden needs to carefully manage the Strategic Petroleum Reserve. After aggressively using these inventories in 2022, the U.S. has fewer than 370 thousand barrels in its SPR. While this leaves room for more releases if the Administration wants to pressure gasoline prices (for whatever reason), it needs to be very careful. After all, earlier this month, it canceled plans to refill these reserves due to high prices. There is little room for error here.  Energy Information Administration So, what does all of this mean for investors? What I Make Of This I have close to 20% of my entire net worth invested in oil and gas equities. As most of my readers know, I am knee-deep in this industry, as I believe that the shifting supply/demand balance has created a very favorable post-pandemic environment. On a long-term basis, I believe in a bullish fossil fuels energy cycle. As a result, I own upstream companies (mainly through Canadian Natural Resources (CNQ)), midstream exposure through Antero Midstream (AM), and oil and gas royalties through Texas Pacific Land (TPL), which is one of the largest landowners in the Texas Permian Basin. Technically speaking, elevated turmoil in the Middle East is super bullish for my investments.  It puts a bigger emphasis on the Permian, which is the only major basin in the United States capable of significant output growth. Higher output and prices benefit TPL, as it boosts both volumes and pricing benefits (royalties). Canadian oil sands have very low breakeven prices and deep reserves, which benefits the oil majors up north. In general, midstream companies benefit from the bigger emphasis on energy exports from North America. That's where Antero Midstream (and its many peers) come in.  In light of what we just discussed, I believe the situation has gotten a bit more bullish. Tensions are rising and oil is a key factor in any geopolitical relationships at the moment. While the attack on Saturday does not warrant higher oil prices, I feel confirmed in my belief that having significant oil and gas exposure is a huge pro in this economic environment - especially in light of potential implications for an economy that is already struggling with elevated inflation and sticky rates. Takeaway In a world where geopolitical tensions simmer, the recent escalation in the Middle East underscores the fragile balance of global energy markets. While the direct impact on oil prices may seem subdued for now, the broader implications for supply chains, inflation, and economic stability cannot be ignored. As an investor with significant exposure in the oil and gas sector, I see this turmoil as a confirmation of my strategy. By maintaining a diversified portfolio, including exposure to upstream companies like Canadian Natural Resources, midstream assets such as Antero Midstream, and oil and gas royalties through Texas Pacific Land, I position myself to capitalize on opportunities emerging from geopolitical turmoil.  On a long-term basis, I remain bullish on oil and gas and urge investors to keep a close eye on the geopolitical implications discussed in this article.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2427772350"}