A Deal Is Announced
World powers have been negotiating a deal to lift economic sanctions from Iran. The negotiations have gone on for a long time, but a deal recently was reached.
Headline Concerns
In recent weeks the negotiations have brought concern to the oil market that Iran would flood the world with oil USO and exacerbate the world oil "glut". Once the sanctions are lifted Iran is expected to increase oil exports by 500,000 barrels as soon as sanctions are lifted and an additional 500,000 barrels in the following 6 months. This in itself is concerning but much more concerning is the reported 30 million barrels of oil being stored at sea by Iran.
Middle East Turmoil
The additional oil supply could weigh on oil prices. What would have the opposite effect on oil prices is a major conflict in the Middle East.
85% of Muslims in the world are Sunni Muslims. The other 15% of Muslims are Shia Muslims. Shia muslims are in parts of Iraq, Lebanon and Bahrain as well as all of Iran. Iran and Saudi Arabia don't get along. During the recent negotiations to lift sanctions Iran was reportedly backing militants fighting in Yemen that threatened and were fought by Saudi Arabia. Besides a conflict between Sunni and Shia Muslims that dates back to the death of Muhammad, Muslims and Jews also share differences with one another going back to biblical times. Israel's Prime Minister Benjamin Netanyahu has spoken before congress warning about the talks with Iran. Now with the deal done Israel has called the deal "one of the darkest days in history". Senator Lindsey Graham has said that the Iranian deal is "akin to declaring war on Israel and the Sunni Arabs".
Conclusion and Investment Implications
The lifting of sanctions from Iran have had implications beyond bringing additional oil to the market. Whether the deal with Iran is seen as good bad or otherwise it is currently having a large impact on the Middle Eastern region. The deal with Iran has caused turmoil in the Middle East and has created a potentially more explosive situation in the future. Rather than the prospect of oil prices plunging due to increased supply coming to the market the potential for Middle Eastern conflict and the disruption of supply and much higher oil prices is now more possible.
A conflict in the Middle East would send oil prices higher and everything oil related would rise with the higher crude oil price. There are many oil related stocks that have had their share prices more than halved due to the recent oil bear market. Besides the great reduction in future oil production investments that have already occurred and the current falling supply in the US, any supply related concern from the Middle Eastern region would greatly increase the price of oil. Personally I am long Chesapeake CHK, Conoco Phillips COP, and Ensco ESV for the long term for the eventual return to higher oil prices. CHK is a turnaround story being driven by management as well as extreme negative sentiment. With CHK's large foot print in US shale and greatly depressed share price, as well as ~ 30% short interest higher oil prices would very likely make CHK double from current prices. Additionally CHK is also largely a natural gas producer and the US is set to begin exporting natural gas in late 2015/early 2016, is already sending natural gas to Mexico and bringing more online to send and natural gas is being used more in the US for electricity production with natural gas having recently overtaken coal as an electricity producer in the US. COP has also been making investments to stabilize its oil portfolio with a large weighting in the US. ESV is the best of breed offshore oil driller. The offshore drilling sector has been hit very hard with the decline in oil prices. Higher oil prices would also send ESV higher.
The time to buy stocks when looking for value and potential outsized returns is not at the top when recommended by analysts, but when fear is still in the air. A conflict in the Middle East would make oil prices head higher very quickly. The decline in the US rig count as well as large quantities of oil coming out of the Middle East are important to current and future oil prices. A decline in oil supply from the Middle Eastern region could not be immediately replaced by the shale producers in the US. The resulting supply/demand imbalance price shock would be large. The supply/demand imbalance is already reaching equilibrium with strong demand being seen and the EIA estimating global petroleum consumption to grow by 1.3 million b/d in 2015 and by 1.4 million b/d in 2016.