Sunday, January 3, 2016

We'll see $150 oil overnight if the Iran-Saudi spat becomes a shooting war

Both countries have the capacity to cripple each other's oil infrastructure. Ponder that for awhile when you contemplate the potential ramifications of the scary headlines you're seeing today.

Outrage over Saudi's execution of a prominent Shia cleric has got the entire neighbourhood on a keener edge than ever before. This is a story that has numerous backstories. There's an ongoing power-struggle going on in Saudi Arabia that is both internecine and inter-generational, and all bets are off on who might prevail.

Then you've got your outside interests, primarily the US, Israel, and Russia. The American's have been making nice with Iran, at least at the official level. However, there is a huge cadre of neocons in the beltway who have seen these efforts to normalize US-Iran relations as a stab in the back to our Israeli allies. And of course that's how it's perceived among some elements of the Saudi elite as well.

Meanwhile, there's also been a steady back and forth between Moscow and Riyadh in diplomatic traffic. At least some elements in the Saudi ruling clique recognize that the current "make up for price by selling more volume" strategy is, in the long run, economic suicide for Saudi Arabia. If it goes on long enough, it will cripple the Russian economy as well.

That's a lot of very unpredictable balls in the air.

The prudent investor might want to consider bulking up on crude futures. WTI has gained a couple of percentage points today, but that's nothing compared to what will happen when the Strait of Hormuz is shut down.

And that is a very real and very imminent possibility.

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