Seeking Alpha

Ending Nuclear Deal Is Right, So Make Money On It

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Includes: ANDV, CDEV, ECA, FANG, HP, KO, MPC, OXY, PSX, PXD, USO, XOP
by: Kirk Spano
Summary

President Trump has said he won't renew the Iran nuclear deal again.

Iran continues to be the largest state sponsor of terrorism in the world.

Sanctioning Iran reduces Iran's ability to fund terrorism, act militarily in the Middle East and puts pressure on the Ayatollah.

There is clearly a financial incentive beyond geopolitics to sanction Iran -  so what, smart investors will make money on it too.

MoSI I know some folks are skeptical of U.S. foreign policy. That's understandable. Anything that is imperfect is easy to criticize. And, everything is imperfect.

I take the view that America is a mostly benevolent influencer of global policy. We use economics, diplomacy and the military to push our view of the way the world should be.

In most cases, our view of how the world ought to be, is right or close to right. America is the "first new nation." We believe in liberty, equality of opportunity, individualism, separation of church and state, republicanism, democracy, and capitalist economics with conscience.

That's why I don't share the view of cynics that the United States is making the world worse. On the contrary, I share the view of Australia and many others, that without the U.S. acting as a power since WWII, the world would be a much worse place.

So, take the pot shots. Point out profiteering by greedy folks who play the system. Expose when the military oversteps or makes a tragic mistake. Call to account any politician on the take. But, never forget, nor doubt, that America has been a force for good and that should always be our role in the world.

Iran's Government Must End

The Iranian government, particularly the religious leaders and specifically the Ayatollah, have been unquestionably the biggest supporters of terrorism globally for a very long time. Anybody who wants to deny that can argue with the CIA or any reputable think tank.

Iran still top state sponsor of terrorism, U.S. report says

Iran's Support for Terrorism in the Middle East

Since the Islamist revolution, the nation has devolved into a state sponsor of terrorism. The Ayatollah has meddled in politics far more than the previous Supreme Leader and torn down many of the institutions that made Iran a likely place for democracy and freedom to thrive. He has instituted an essential police state.

Remember, Iran is a nation with a large young educated population, an entrenched kind politeness and a proud impressive history. Any policy should have at its heart the goal of helping them take back their country.

12 Things You Didn't Know About Iran

What Iran has devolved into is heartbreaking. Many hope that when the Ayatollah dies, that there is a return to separation of mosque and state.

Religion and Politics in Iran

For background on Iran, here is a great summary from Politico that fairly outlines what went wrong in Iran.

The 12 people and things that ruined Iran

The Iranian government has supported anti-Israel militias and terrorist groups, backed a proxy war against Saudi Arabia in Yemen, sent troops to support Assad in Syria, incurred into Iraq, recruited and supported terrorists in Pakistan and Afghanistan, continue to support Hezbollah and appear to have been the backing behind the disaffected Saudis who attacked the United States on 9/11.

The Iranian Revolutionary Guard Corps [IRGC] have become the defacto overlords in Iran and have been active in Yemen, Iraq and Syria. The group has provided money and training to militant Shia groups in Bahrain and apparently Morocco.

"Iran's foreign ministry denied Moroccan allegations that it delivered weapons to the Algerian-backed Polisario Front, a Sahrawi rebel national liberation movement seeking independence in the disputed Western Sahara, The Daily Star reported May 2. Morocco cut diplomatic ties with Iran on May 1, including closing its embassy and recalling its ambassador, after discovering a recent weapons shipment was sent via an element at the Iranian embassy in Algiers."

Stratfor

There is also a list of tragic events that has ties to Iran's support for terrorism. The Iranian people deserve better than a government that promotes a cult like obsession with promoting a view that only war can result from.

Iranian People are demanding: "Regime Change in Iran is the Only Solution"

We should help them make that change.

The Impact of Sanctions

This is a very simple equation on why President Trump should sanction Iran again and defacto end the nuclear deal. By imposing sanctions on Iran, that will start to dramatically reduce their ability to export oil and gas within months.

Iran Oil Exports That will have two impacts. First, the ability to support terror and their own military will decrease. This is important as it reduces their ability to expand their influence and engage in or promote violent acts. The danger is that there is one last violent thrust.

The second impact is more subtle. The government will face economic pressure that impact the people. We have already seen people take to the streets just a few months ago largely over economic grievances. Will they tolerate a government that is such a bad global actor that it hampers their own standards of living? I doubt it.

Clearly in the past 9 years there have been rumblings of change in Iran. The day could come quicker than many anticipate the Iranian people step up again.

Ultimately, sanctions create a one-two punch that is likely to be effective. The key is supporting and befriending the Iranian people when the time comes.

Financial Conflict of Interest

Many believe that the United States wants higher oil prices in order to support the domestic economy. There is some truth to that. We have all heard President Trump talk about the United States as an energy superpower.

Here's the rub. Oil prices higher than about $80 per barrel become a detriment to the economy, even if some players make boatloads of money. President Trump is likely mindful of that. There is little to make me believe he wants to see $100 plus oil. Here's where another "deal" comes into play.

Saudi Arabia has about 2-3 million barrels of oil that it can relatively quickly add to global oil supply when called upon. It was their flooding of oil to the markets in 2014 that drove oil prices down and likely forestalled at least a small recession.

I have covered the interrelationships of America, Russia, Saudi Arabia and Iran before. The short story is that Russia hates the Ayatollah too and doesn't mind higher oil prices as long as it does not cause a recession. This is important since it will play a role in Russia taking its time to "evaluate" what to do when the critical moments happen, i.e. they're going to let the Ayatollah fall.

Is This 'The Calm Before The Storm' On Iran And Oil?

So, it is likely to me that we do indeed find a Goldilocks of oil in the $80-100 range when Iran's supply starts to come off. There won't be $300 oil or even $150 oil. Those are hype headlines to get attention and sell newsletters. Even if oil surged to $150 per barrel for a moment, it would only be a moment as Saudi Arabia and the other Gulf Cooperation Council members would pledge more production, the U.S. sold off strategic reserves and other investment was announced (Venezuela maybe).

Oil Price's Goldilocks Moment

When that supply comes back, we will see the price drift down, but not much. Ultimately, the price of oil does not head back to the current levels until electric and hybrid vehicles really start to take market share, as I have shown by this EIA chart I expanded upon:

Oil Demand

You can find more of my thoughts on the eventual growth of the EV and hybrid markets here:

Tony Seba, EVs, Solar And $25 Oil

What's An Investor To Do?

I have been pounding the table for investors to increase their asset allocation to oil stocks. I offered suggestions in several recent articles.

Here I suggest buying the SPDR Oil & Gas Production & Exploration ETF (XOP) and U.S. Oil Fund (USO):

Oil At The Doorstep Of $80/Barrel

Here I offered Pioneer Energy (PXD), Diamondback Energy (FANG) and Centennial Resource Development (CDEV):

The New 'Golden Age' For Oil Stocks Is About To Begin

In the Goldilocks article I reiterated Encana (ECA), Occidental Petroleum (OXY) and Helmerich & Payne (HP).

A corollary to adding oil exposure is to reduce exposure to certain industries that thrive on lower oil prices and see decreased margins on higher oil prices. One such place flying under the radar for people are the oil refineries. There is way too much interest in refiners and petrochemicals.

On the petrochemical front, keep an eye on alternatives to using petroleum in things like plastics. There's already a process to convert methane into plastic and it's so effective companies like Coca Cola (KO) are using it. The company I'm keeping an eye on is a private outfit in California called Newlight Technologies. There's others too, that are going to put a hurt on the petrochemical companies in the 2020s.

As oil prices rise, the margins that refiners can make start to decrease. I removed Phillips 66 (PSX) from the Margin of Safety Investing "Very Short List" of stocks that can lead in the next decade a few months ago, and I am removing Andeavor (ANDV) now after the huge move up and the announcement of a buyout by Marathon Petroleum (MPC). I don't want refiners anymore, they're run is almost done.

Disclosure: I am/we are long XOP, ECA, OXY, USO. 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 - BluemoundAssetManagement.com - 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.