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Iran, a Pipe Dream

Posted January 3, 2018 at 4:30PM

Last year I predicted that oil, specifically West Texas Intermediate, would end the year with a price of $61.55 a barrel. On the last trading day of the year, it closed at $60.28. I apologize for falling short.

As I write this, WTI is trading at $60.85, and it is in a solid uptrend. The price of crude has been going up since January of 2016. 

oilto106

As you can see by the chart above, it is now at a crucial point. Either we are sitting at a double top and the market will sell off, or we are looking at a breakout with no real resistance until you hit $93.

You have to think the price of oil will jump higher. For one, the dollar index has been falling all year and could fall another 10% this year.

Oil is priced in U.S. dollars for the most part, so as the dollar goes down in value, the price of oil and other commodities goes up.

Dow Jones FXCM Dollar Index:

oilprice105

The second reason is the Iranian revolution 2.0.

Anti-government forces are out on the street having rallies in the biggest protest wave we’ve seen since the 2009 Green Revolution. People are getting killed and others are being hauled off to dark holes by the Revolutionary Guard. 

During the last mass Iranian protests, oil went from $40 in the spring of 2009 to $80 a year later.

Iranians are young, 25 years old on average, born 14 years after the 1979 Islamic takeover. They care less about religious fundamentalism than they do about getting a job and feeding their families.

It is difficult to determine how far the protests will spread and what will come of it. History tells us that the rot inside dictatorships is well covered by paint and varnish. It looks good until someone pokes a hole in it.

Crude Talk

Last year Iran produced 3.8 mb/d of crude. Obviously, that large a disruption would cause an oil shock. Global oil demand has been growing at 1.5 mb/d for 2017. Global supply rose 0.2 mb/d in November to 97.8 mb/d, which was the highest in a year.

Global demand will accelerate in 2018 as global GDP hits another gear.

As you can see, the demand/supply balance is very tight.

oilto107

And this is at a time when the U.S. is producing record amounts of oil at 9.48 mb/d. That’s a lot of oil and the highest U.S. output since the 1970s. 

There are questions about how much more oil the U.S. can produce, and the number varies wildly from 720,000 bpd to 1.1 million bpd.

If I were a betting man, and I am, I would say there is a good chance that the price of crude will lurch higher. The way to play it is to find U.S. shale producers that are unhedged or, even better, new producers in Mexico.

The downside is limited barring a recession or a sudden OPEC change. The upside is $105 oil with a geopolitical catalyst. 

All the best,

Christian DeHaemer Signature

Christian DeHaemer

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Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Crisis & Opportunity and Managing Director of Wealth Daily. He is also a contributor for Energy & Capital. For more on Christian, see his editor's page.

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