President Trump Validates Iran War Thesis And More Expensive Oil

Sep. 27, 2017 2:13 AM ETOXY, OVV, HP, XES, USO, OIL-OLD, UCO, SCO, BNO, DBO, DTO, USL, DNO, OLO-OLD, SZOXF, OLEM, OILK, OILX, OVV:CA38 Comments

Summary

  • Confrontation with Iran seems inevitable.
  • President Trump is increasing the pressure on Iran.
  • Oil stocks will surge when the first shot is fired.

About two weeks ago, I wrote that "An Iran War is Coming - Buy Oil Stocks Now." I was pilloried by quite a few commentators and even a few Seeking Alpha contributors (there are around 700 comments on that viral article so far - take a look). The short thesis of the article is that the odds of a war situation in or with Iran could cause an oil supply disruption in the next few years, lifting oil prices.

My Iran article caused such a stir that several contributors have mentioned it or taken the time to type out replies to my extensively sourced column. Two called the article "click bait," which I do find ironic given they wrote in reply with pretty evocative article titles.

One of the "click bait" accuser articles was written by a contributor who is clearly a generalist. This contributor's thesis was that oil prices were headed down from here. He gave little support for the thesis, and if he's right, it's lucky, in my opinion. This author and I have had a little dust up in the recent past. It seems he just wanted to take the opposite side of me and get his penny per click, so I'm not going to bother linking. If you want a fully laid out argument for why oil prices might head down, read and watch Tony Seba's thesis. I don't agree with Seba and will rebut soon, but it's worth knowing what an actually researched analysis of falling oil prices looks like, even if it turns out to be wrong.

The other article was a blog post by Bret Jensen. Bret is also a Seeking Alpha Marketplace contributor like me. His focus is biotech and small caps. His article postulated that oil prices would remain range-bound. On the surface, the very current evidence could support that idea, so it can't be dismissed out of hand. He did dismiss the idea of war in or with Iran, however, which belies a general lack of depth on the topic.

This week, the President of the United States, Donald J. Trump, gave a speech to the United Nations that was largely focused on Iran as a global threat. If that is not a harbinger and support for my Iran war thesis, then I don't know what is. People who dismiss the ideas of the President of the United States (like when President Obama said in Spring of 2009 he'd be "buying stocks" if he could), regardless of who that president is, are making a historically and galactically stupid mistake. Here is why President Trump's speech should wake you up to the opportunity of buying oil stocks while some are undervalued.

What President Trump Said

President Trump's speech to the U.N. was widely criticized and questioned by the media. The general complaint was that his discussion was too direct for the U.N. and not the right message. Clearly, the president was trying to stir up the established status quo - as usual.

What many people are missing about President Trump, in my opinion, is that he is fairly calculated. The idea that he is scattershot, or dumb, or crazy is, I think, flat out wrong. Donald J. Trump is a lot of things, but those aren't the things I'd call him.

Having studied President Nixon and recently talking to a pair of big league Republican political strategists, I think people ought to consider that President Trump's modus operandi is to keep people off balance by using distraction and extremism. It is an amplified version of what President Nixon did.

How this impacts the Iran situation is interesting to me. On one hand, we have President Trump pandering to his base and criticizing the NFL, but after having given a U.N. speech that says this:

"The Iranian government masks a corrupt dictatorship behind the false guise of a democracy. It has turned a wealthy country with a rich history and culture into an economically depleted rogue state whose chief exports are violence, bloodshed, and chaos. The longest-suffering victims of Iran's leaders are, in fact, its own people.

Rather than use its resources to improve Iranian lives, its oil profits go to fund Hezbollah and other terrorists that kill innocent Muslims and attack their peaceful Arab and Israeli neighbors. This wealth, which rightly belongs to Iran's people, also goes to shore up Bashar al-Assad's dictatorship, fuel Yemen's civil war, and undermine peace throughout the entire Middle East."

Folks, that is all exactly right and came straight from his staff. President Trump did not write that. He believes it, in my opinion, as do I, but he didn't write it. There is a lot behind the U.N. speech, and it is direct.

He went on to say...

"We cannot let a murderous regime continue these destabilizing activities while building dangerous missiles, and we cannot abide by an agreement if it provides cover for the eventual construction of a nuclear program. (Applause.) The Iran Deal was one of the worst and most one-sided transactions the United States has ever entered into. Frankly, that deal is an embarrassment to the United States, and I don’t think you’ve heard the last of it - believe me.

It is time for the entire world to join us in demanding that Iran's government end its pursuit of death and destruction. It is time for the regime to free all Americans and citizens of other nations that they have unjustly detained. And above all, Iran's government must stop supporting terrorists, begin serving its own people, and respect the sovereign rights of its neighbors."

If that is not a call to arms, I don't know what is. That is not "joking" language. And once again, I point out, that speech was written by his staff. It is not a 4 am text from the toilet.

What Is Next With Iran

President Trump's next statement makes it clear to me what he wants. He wants an Iranian uprising to support.

"The entire world understands that the good people of Iran want change, and, other than the vast military power of the United States, that Iran's people are what their leaders fear the most. This is what causes the regime to restrict Internet access, tear down satellite dishes, shoot unarmed student protestors, and imprison political reformers.

Oppressive regimes cannot endure forever, and the day will come when the Iranian people will face a choice. Will they continue down the path of poverty, bloodshed, and terror? Or will the Iranian people return to the nation's proud roots as a center of civilization, culture, and wealth where their people can be happy and prosperous once again?"

As I said in the original "Iran" article comments, there are several scenarios for confronting the country:

  • Proxy wars
  • Supporting an uprising
  • Direct conflict

The first option is already happening. There are Iranian Islamic Revolutionary Guard Corps (IRGC) in Syria, Iraq and Yemen right now. Many point to this as proof that the country's army is not to be trifled with. I agree, if the time comes, the conflict will be serious. Any analyst can see that Iran's military is stretched pretty thin right now though. Destroying supply lines and targeting the IRGC throughout the region would be blood sport for the U.S. and Israel if the time comes - frankly, I believe it's a matter of when not if.

The second scenario is the most promising, as it supports the first and avoids the third. If the Iranian people once again try to take their country to real democracy, not the fake, manipulated, theocratic garbage they have now, then the support of Special Forces could make the next uprising successful versus the horrible outcomes in 2009 of the brutally put down Iranian Green Movement.

The third option, which is the least likely to occur, is horrific, as it would not only cause massive loss of life but could destroy the fabric of the Iranian potential to integrate with the rest of the world. What do I mean by that?

The Iranian people, particularly in the cities, are good people. They are not terribly unlike us. They are educated, more secular and motivated by the same ambitions of life, liberty and happiness that we are. If there is a full frontal war with Iran, the loose, but real, bond with the West could be lost. In my opinion, the U.S. and Israel should do everything possible to support an uprising and the destruction of the IRGC. I believe many, if not most, analysts in the administration agree.

The Impact On Oil

As this is an investment website, we should take special care to look at the financial implications of an Iranian conflict. With regard to oil, as I detailed in the last article and in others, there is the very real potential that Iranian, and to a lesser extent Iraqi, oil supplies could be curtailed for a year or more if there is a conflict.

It would not be far-fetched to see 2 or 3 million barrels per day of oil come off-line for an extended period before Western companies - Total (TOT) being one in negotiations - brought production back down the road. Of course, the Strait of Hormuz would also be disrupted, but only very temporarily most likely, as U.S. military might is unlikely to be tested there for long.

The wildcard, as I said before, is Russia. They could make any conflicts in Iran much more serious for the world. But, as I said, I think it is far more likely that Putin throws the Ayatollah under the bus and uses the Russian military as a peacekeeping force within Iran. That makes him look like a White Knight, which he craves, and keeps Russia's presence in Iran secure (at least for a while).

From a tactical standpoint, history is not with the Ayatollah, and Putin knows that. The demographics of Iran do not support a theocratic regime lasting without conflict forever. However, they could last long enough to attain nuclear weapons, which is the redline, since many believe they'd be willing to use those weapons.

In any case, if the oil supplies were disrupted from Iran, that would throw global oil out of balance and drive prices up dramatically right into the Saudi Aramco IPO (ARMCO). There is no doubt that Saudi Arabia would like that.

Investment Thesis Intact

I believe oil is headed to $80 per barrel by 2020 without an Iran conflict, but with an Iran conflict we could see $100 very easily. In either case, a slow drift up in oil prices to $80 per barrel, or a drift then surge to $100, is what I see coming.

Either way, the companies and ETF I recommended in the last article are still buys. All are up since I published that article, as I timed the article with technical rebounds (as I usually try to do). All of these are still buys today:

Occidental Petroleum (OXY) is on the "Dividend 30" at my investment service, Margin of Safety of Investing. Occidental is a great place to put money to collect a nearly 5% dividend while waiting for more expensive oil. The company has a strong balance sheet, great assets - including in the Permian Basin - and is a takeover target by a major, if rumors are true. Exxon (XOM) has been mentioned the most as a potential suitor of Occidental.

Encana Corp. (ECA) is lean machine also with a great position in the Permian. It could be bought in whole or in part. If it is bought in parts, it is likely that the Texas oil assets would be bought, leaving the company as a Canadian natural gas producer. If that transaction occurred, I believe the stock would shoot past $20 per share and the remaining "newco" would be primed to be massively profitable.

Helmerich & Payne (HP) is also on the "Dividend 30" list at Margin of Safety Investing and paying over around 5%. It is the largest land driller in the United States and a leader in fracking.

SPDR S&P Oil & Gas Equipment & Services ETF (XES) is highly correlated to moves in the price of oil. The fund is also very clean after many of the companies fell out or were replaced in the past few years. I did a complete analysis in an ETF File article titled "Funds To Buy For Rising Oil And Gas Prices."

The bottom line is that I see rising oil prices for the next few years, before a plateau period lasts until the mass adoption of electric and hybrid vehicles. I discussed that scenario in "The Coming 'Peak Oil Plateau' and Higher Oil Prices" and will be presenting several articles in coming months, including a technical analysis from a top futures trader. Buy oil stocks now.

This article was written by

Kirk Spano profile picture
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25+ years of beating markets with less risk. MarketWatch.com's "The World's Next Great Investing Columnist." Growth, dividends and option income.


I run a small boutique registered investment advisory and I have been managing money since the 1990s through several major market cycles. I have been widely syndicated and appear as an investing expert in the media.

I publish the Margin of Safety Investing letter on Seeking Alpha. You’ll find asset allocation with my Global Trends ETF portfolio, growth & dividend stocks with at least 3x total return potential and what might be the best retirement income generation service on the web using option selling to add extra income on top of your dividends. 

Disclosure: I am/we are long ECA, HP, OXY, XES. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own a Registered Investment Advisor, however, publish separately from that entity for self-directed investors. Any information, opinions, research or thoughts presented are not specific advice as I do not have full knowledge of your circumstances. All investors ought to take special care to consider risk, as all investments carry the potential for loss. Consulting an investment advisor might be in your best interest before proceeding on any trade or investment.

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