The oil market is greatly underestimating what has just happened.
The Green Light for oil profits was turned on yesterday by US President Trump. I’m going to take advantage of it…. will you?
Back during his Presidential campaign, Donald Trump repeatedly referred to the 2015 Iran Nuclear Deal (The Joint Comprehensive Plan of Action) as the “worst deal ever…….. disastrous”.
You can hear him saying those words.
True to those words in this case, President Trump has now pulled the United States from that deal.
On top of that President Trump has announced that he will re-instate “the highest level of economic sanctions” that had been waived as part of the deal.
Image Source: Flickr
The oil market is only starting to react to this news. Trust me though, it soon will.
The reinstatement of these sanctions could shake the global oil markets. The chart below shows very clearly the impact that the sanctions have on Iranian oil production.
When the sanctions were imposed last time, Iranian production collapsed by 1 million barrels per day.
Since the sanctions were removed Iran has added back those 1 million barrels per day of oil supply to the global market.
Now the sanctions are back on which should obviously be huge news at any time for the global oil market.
But today isn’t just any time. Today we have a global oil market that is already extremely tight. Tight isn’t the correct word; the oil market today is already significantly undersupplied.
That isn’t an opinion of mine…that is a fact that is clearly demonstrated by what has been happening to the amount of oil in storage around the world.
Global inventory levels have been dropping at an unprecedented rate. Over the past 12 months global inventory levels have shrunk by more than 300 million barrels.
Think about what that means…..
If inventory levels have fallen by more than 300 million barrels daily–then oil consumption must have exceeded daily oil supply by almost 1 million barrels per day.
Remember, that was with Iran production not being restricted by sanctions.
With President Trump re-imposing not just sanctions, but “the highest level of sanctions” we could be looking at another 1 million barrels per day of production disappearing.
That would leave us with a global oil market that is undersupplied by almost 2 million barrels per day………an almost unthinkable shortage.
The Stakes Are Extremely High
Crunching the numbers and seeing the huge daily production shortfall that the world is going to be facing with these sanctions turned back on is actually the easy part.
Trying to figure out the political implications of the U.S. exiting the Iran Deal is far more difficult……and disturbing.
With sanctions back on Iran might as well go ahead and restart its pursuit of nuclear weapons capability.
That isn’t going to go over very well with some of the neighbors in that region.
Israeli Prime Minister Netanyahu has already said the following in reaction to Iran’s continued push into Syria:
“We are determined to stop Iranian entrenchment near our borders and are able to take actions that could include butting heads…..we are ready for any scenario, even a confrontation”
What will Israel do if Iran does in fact kick the nuclear program back into gear?
Then there is Saudi Arabia and the Crown Prince Mohammed bin Salman–who is also not a big fan of Iran.
The Crown Prince and the Saudis represent the only real amount of spare oil production capacity on the planet. This is a man with his own motivations; a man who has clearly laid out a plan to transition Saudi Arabia away from a reliance on oil exports.
A key part of this plan is to monetize a portion of the Crown Jewel — Saudi Aramco.
With an IPO of Saudi Aramco in the pipeline the Crown Prince has exactly zero reason to increase Saudi production to offset the decline in Iranian production that the re-imposing of sanctions is going to result in.
Nobody would like to see $100 oil more than the Crown Prince.
From One Extreme To The Other – Glut To Shortage
If you add up everything that we are looking at, a pretty clear conclusion can be drawn.
1 – The global oil market is already significantly undersupplied. The huge decrease in global inventory levels over the past year is concrete proof of that.
2 – President Trump just re-imposed sanctions on Iran which could push the daily oil supply and demand even further into deficit. We could be talking about a frighteningly fast fall in storage levels going forward.
3 – Iran and Israel are one mistake away from direct conflict.
4 – The only player in the game with spare production capacity is highly incentivized to let oil prices rise.
Today we are very much faced with the risk of an oil price spike that we have not seen since the 1970s.
The crazy thing is that the share prices of oil producers have never been cheaper.
For the most part I’ve been out of oil stocks since the middle of 2014. I’m back in now and trembling with greed over one company in particular.
Fat profit margins, clean balance sheet, big dividend and a management team that owns a bunch of their own stock….. this one ticks all of the boxes. Oh yes, and they are completely unhedged… so shareholders get the full benefit of this rise in oil price.
If you are interested in reading a free full report on this company all you need to do is click HERE.