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The Consequences Of Trump’s Iran Standoff

Hedge funds right now are mostly interested in how a potential war between the US and Iran will impact oil prices. Indeed, while the Trump administration itself does not seem to have a strategy or a real endgame here that it can control, plenty of damage has already been done. Iraq, it seems, is the first real victim in this escalating battle. It’s already livid that Exxon evacuated oil staff, viewing the move as an unnecessary one that sends a damaging message to investors. The rocket attack last Sunday in Iraq’s Green Zone (the first in some 8 months) was headlined in the media as “near the US Embassy in Baghdad”, and thus increased tensions further, even though it was a mile from the embassy and the perpetrators are unknown.

The Iraqi PM informed the world Tuesday that Iraq had prepared alternative routes for crude exports should a war erupt between the US and Iran. Those “alternative” routes would bypass the Strait of Hormuz and presumably reroute through Turkey, which to our mind is unrealistic. What they mean is that they would reroute oil through Iraqi Kurdistan to the Turkish Port of Ceyhan. The Iraqi Kurds would be the majors winners from such a deal. But Iraq already has a problem with this method of export and Iraq’s oil from the Kirkuk fields is already stranded (they were earlier trying to truck it across the border to Iran). In fact, a new round of conflict is brewing over the deal that has helped Baghdad increase crude exports and make payments to the Kurdistan Regional Government (KRG). The pipeline in question has a capacity of 1 million bpd. Despite the unrealistic nature of this “strategic alternative”, both Qatar and Kuwait have approached Iraq for export route alternatives.

More broadly, there are indications that Trump is trying to slip a Saudi arms deal through, bypassing Congress. Iran is the perfect excuse for selling arms to the Saudis - who are incessantly lobbying Washington over Iran - despite the Khashoggi assassination.

But while everyone’s attention is distracted by the US-Iran rhetoric, there are two more happenings in the geopolitical oil patch that require serious attention - and both have to do with Russia. While this attention is diverted, the Russian ruble is the best-performing emerging market currency so far this year, immune to the US-Iran tensions and even defying sanctions. With the ruble this strong, there is a reasonable argument that Russia will have far less motivation to continue with the production cut deal, with OPEC+ set to meet next month.

At the same time, Russia’s efforts to buoy Maduro in Venezuela are picking up momentum. The two countries are now talking about using the Russian ruble for mutual trade settlements - bypassing the US dollar. They are also talking about using Venezuela’s state-sponsored, oil-backed cryptocurrency; meaning that mutual trade settlements could be closed using the Ruble and the Petro, whose value is pegged to the price of a barrel of Venezuelan oil. That move is being furthered strengthened by the Russian Central Bank’s announcement this week that it may consider issuing its own gold-backed cryptocurrency. The stated purpose of this is to conduct mutual settlements with global jurisdictions - in other words, to circumvent US sanctions.

Oil: How Maduro Is Fleecing Venezuela’s Oil Company

Findings from a recent investigation show that a Nicaraguan company called Albanisa (Alba de Nicaragua SA) has operated as part of a front-company scheme to launder money for Venezuela’s state-run PDVSA, with Albanisa believed to have laundered up to $6 billion in illicit funds over the past decade. This criminal network is said to have been created by Hugo Chavez in collaboration with political allies in Nicaragua, Cuba, Bolivia, Ecuador, Suriname and El Salvador, as well as figures in the US, Russia and Hong Kong, among others. In other words, it was a vast global criminal network, with Albanisa currently in the spotlight as an investigation showed that it received funds from Venezuela that went well beyond the price of oil that it imported from the country. Documentary evidence claims to show that the company was established by Chavez and Daniel Ortega in 2007, with PDVSA owning 51%, and a Nicaraguan company, Petronic, owning the rest - all controlled on the Nicaraguan side by the Ortega family’s inner circle. Basically, the investigation claims that Maduro took the project over and used PDVSA to create a consortium of companies that could move money embezzled from PDVSA out of Venezuela and also to launder drug-trafficking money, possibly through a connection with Colombia’s FARC. Ortega has allegedly created a vast number of paper companies on his side, with fake projects (refineries and other infrastructure) to launder money that is then moved back to Maduro and the criminal elite in Nicaragua. The investigation also alleges that Bancorp (founded in 2014 in Nicaragua) is their bank of choice for money laundering activities. The bank was placed under US sanctions in February this year and is now undergoing voluntary dissolution.

Renewables: Is Lithium A Winner In The Long-Term?

One of the fullest pictures we’ve gotten recently on lithium has been the quarterly returns of Chile’s SQM - the second-largest lithium supplier in the world. New supply has been coming into the market, and prices have fallen, hitting out at SQM’s earnings. For 2018, lithium consumption was at about 260,000 tonnes, but for this year SQM predicts it will reach 315,000 tonnes. For SQM the lower prices have managed to shave almost one-third off its Q1 earnings, though higher royalties charged by Chile also played a role in that, as well as discounts it has to offer to domestic battery component producers.

SQM

(Click to enlarge)

And while SQM predicts a 17% increase in consumption this year, it also warns that lithium prices are in for another 25% drop before the year closes. The short-term picture is one in which demand is consistently increasing, but prices are dropping further and demand growth will continue to be overshadowed by supply.

This is not, however, a short-term story, even if some major league miners are avoiding lithium because they think the market will have enough supply.

Citi, Canaccord Genuity and Morgan Stanley all think we will see a massive oversupply of lithium until 2024 or thereabouts, and that prices will be a dismal ~$7,500. One problem will be that while the industry is used to producing lithium for batteries used in consumer electronics and for industrial applications, it will be the EV and energy storage segments that make up the bulk of new demand growth, and these segments require higher-quality lithium. This fact may slow lithium supply growth, and this is why we’re not entirely convinced that Morgan and crew have this right. It is impossible to ignore the clear future demand growth for EVs, and the battery metals demand this will bring. Massive percentages of buyers will switch to EVs in the coming years as they become cheaper, and many surveys already suggest that a majority of consumers will consider an EV for their next car in Europe. If you want to follow the lithium market, follow the EV market. It’s not there yet, and we are set for a further downswing in lithium prices in the interim, but the long-term bet is a solid one.


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