Oil Markets Must Prepare For Maximum Fear

Oil prices this week are responding to what we call a "fear premium" based on tensions in the Middle East sparked by a very vague claim of "sabotage attacks" on Saudi oil tankers off the coast of the UAE. But with the Middle East being what it is - an eternal tinder box that external powers like to shake up every now and then - the so-called fear premium tends not to last, even under a U.S. president with a dangerously loose grip on foreign policy. Speculators have rather short attention spans when it comes to geopolitics, which is why prices settled down on news of growing U.S. crude inventory on Tuesday and Wednesday, before returning to the fear premium as OPEC prepared to convene over Middle East tensions. Speculators don't make long-term bets on war, necessarily. Instead, they bet on whatever will dominate the media as they know that it is the media that shapes oil market narratives.

On the Oil Front:

The "fear premium" moved to Iraq this week, with Washington evacuating non-emergency personnel in a move that has prompted the operators of mega oil projects in Iraq to closely monitor the situation for fear of a breakdown in security over Trump's warmongering with Iran. Reports that Exxon was actually evacuating staff have not been confirmed by the oil giant itself, and claims of intelligence indicating a potential Iranian attack are vague at best.

Why Iraq, exactly? While Iran cannot take on the US in a head-on war, it does have significant asymmetrical warfare power that means any war started with Iran will be regional (and potentially global). Iraq is one such venue; Lebanon is another, and Afghanistan a third. Iran has proxy forces in all three locales among their Shi'ite populations, spanning Iraqi Shi'ite militias, Afghan Shi'ites and Hezbollah in southern Lebanon. Are the fears in Iraq founded? Yes - especially with Iran being put under increasing pressure for the U.S. and tensions brewing in Iraq's oil-rich Basra region. 2020 campaign aside, the purpose of starting this war with Iran is to bring Israel and Washington's nefarious Arab allies (Saudis, UAE) together behind a unified cause/common enemy. In other words, it is the core of a third world war. It seems that an age-old lesson-never-learned, which always culminates in arming groups that are major national security threats such as al-Qaida/ISIS and other Sunni jihadist groups - will see history repeat itself.

But that's the bigger picture. The immediate-term picture is one of an Iran that cannot fight a traditional war against the US, but will make life very difficult, trying to block off the Strait of Hormuz, target a regional financial hub to spark a financial crisis (think, Dubai), or target oil installations in Iraq if Washington does not backtrack on this dangerous path. If the US is pulling personnel out of Iraq, then it indicates Washington is planning something bigger and that this is a preemptive move. Washington is ripe for major foreign policy miscalculations under the current regime, and markets should be operating at the full fear premium.

In the meantime, we note with interest that the US is trying to get Baghdad to sign energy deals with American companies in the event that Iran cuts off the gas supply to Iraq over this brewing conflict. GE is one of the contenders, which is gunning for a $14-billion power deal with Iraq. Where there's conflict, there are new opportunities.

The Saudis are doing their best to make political capital out of the drones strikes on their pipeline and the vaguely defined attack on their oil tankers off the UAE coast. On Friday, the Saudis explicitly called for US airstrikes on Iran, and it's important to keep in mind that the Saudis and the UAE have enormous lobbying power in Washington and have been able to bend Trump to their will in the past. They are actively lobbying for an all-out war with Iran.

On the Renewable Energy Front …

Picking up from where we left off last week, the battle to control the battery market based on energy metals is securing momentum with news coming out of Beijing that the Chinese have succeeded in a technological breakthrough that promises to significantly reduce lithium production prices, and hence the cost of EV batteries.

More specifically, the Chinese government is claiming that its technological breakthrough reduces the cost of lithium extraction to $2,180 per ton. Let's put this cost into perspective: Right now, the range is between $12,000 and $20,000 per ton. Beijing is dangling this in front of Washington, with no details on the nature of the technological breakthrough. And if nothing else, it is spurring legislation in Washington that seeks to make domestic energy metals mining of strategic national importance through the American Mineral Security Act. The Act had a hearing earlier this week with a big show of support from senators in both camps. This is where lithium miners (and especially the juniors) stand to get a big break, so investors should be keeping a close on eye on these developments.

But even more pressing is the fact that Trump's trade war has prompted a very specific response from Beijing which is now threatening to cut off the supply of rare earth metals to the US. That would decimate the US tech sector and some believe this is exactly how China could win the trade war...