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The Man That Could Trigger An Iran War

Oil prices came back down to Earth over the course of week, getting only a slight bump on future supply concerns coming out of Saudi Arabia after last weekend’s attack. No longer is it a question of getting production back online. Instead, the markets are mildly concerned that the Saudis will now have no spare capacity should another attack or disaster strike. Markets go where the action is, and from that perspective, the Fed is more of an issue while world powers play coy over Iran.

In the meantime, US crude export demand has surged following the attacks, and is now estimated to reach 4 million bpd. But those barrels are unlikely to be as economical for Asian buyers, who have to contend with increased shipping rates as well, with VLCC rates increasing by as much as $1 million per load, and Aframax rates increasing by almost $2 per metric ton.

Ego Will Dictate Whether There’s a War With Iran

While there is an intense level of threatening talk going on about going to war with Iran over the attacks on Saudi oil facilities, there are no real indications as of yet that the US administration or the Saudi Kingdom is willing to go that far. Nor is there any concrete evidence that Iran was behind the attacks - attacks that have been repeatedly claimed by the Houthis in Yemen. There is also no evidence as to the launch site for the attacks, which could just as likely have been in Iraq, where disparate groups and militias operate, and where the Houthis have access as well.

If the attacks are proven to have been launched from Iraq, this could ignite another conflict in the country. There are theories floating around that Iran provided material and guidance for these attacks, with the ultimate goal of pressuring the Trump administration to lift sanctions. If so, then the timing is curious, as Trump’s firing of Bolton had already signaled a softening of Washington’s stance on Iran, but there was no time for that to play out in the short time span between the firing and the attacks.

The problem here is saving face, particularly for the Crown Prince of Saudi Arabia (MBS) who has spent the last year trying to repair his reputation in the wake of the Khashoggi murder and in time to launch an Aramco IPO. The attacks wrench open Aramco’s vulnerabilities to attack and also the vulnerabilities of the Kingdom’s defense systems. It makes MBS look weak, and a response will be based on this - not on the realities of a war with Iran, nor on evidence of any kind.

The biggest question right now is not who launched the attack; rather, what will MBS’ response be, and how will he save face. If he fails to save face, the weakness will bring the limits of his power into question - a power that he has painstakingly but clearly solidified, and which allowed him to survive the Khashoggi incident.

The first sign of his weakening power was the UAE’s announcement that it was quitting the war in Yemen because it was too expensive, and ultimately, unwinnable. That move led to actual clashes between Saudi-backed government forces in Yemen and UAE-backed southern separatists - both of whom had been fighting the Houthis in a proxy war against Iran.

The markets have by now accepted the fact that the Saudis will bring production back on track and that supply concerns are not imminent. What they’re waiting to price in now is a war with Iran, which will largely depend on MBS’ next move, which Trump has already said he is waiting on. That means that MBS dictates what happens next on this heated playing field. Pushing the button on a war with Iran, however, would be disastrous for the Kingdom, which cannot even subdue the Houthis in Yemen. It would have to be a world war, or no war. That’s not likely to happen at this time, even for a Crown Prince desperate to save face, while the Russian president chuckles in the background with a tongue-in-cheek offering to sell the Saudis the same air defense system that he’s sold the Iranians.

It’s Unions vs. Electric Vehicles

The United Automobile Workers union (UAW) continues on with its large striking action against General Motors as workers dig in over the upcoming plant closures and two-tiered pay structure. For GM, the path forward is clear: passenger cars are out, SUVs and crossovers are in - at least in the United States. Those passenger car plants that GM announced it would shutter this year are like dead weights and a roadblock to stay competitive in a shifting automobile landscape.

GM’s profits were down in 2018, and while GM would make the case that they were down more than 8% from 2017 pre-tax profits, UAW workers wanting a piece of that pie would say they were still north of $10 billion.

But GM wants more than a piece of today’s lucrative SUV market pie - it wants a piece of tomorrow’s EV market pie. And EVs take cash, because they are certainly not turning a profit today. Just ask the Chevy Volt, which has been a major money loser for GM, despite its repetitive commitment to an all-electric future. You could also ask Tesla, which still isn’t churning a profit.

GM is gearing up to take part in this all-EV future, but not all of its EV competition plays by the same rules. Tesla doesn’t have the union to contend with, and it seems to have a whole host of investors who have endless patience with its lack of profit.

Not so with GM investors, who include the likes of Capital Research & Management Co, Vanguard Group, Berkshire Hathaway, and BlackRock Fund Advisors, to name a few, who want not only an EV future but a profitable today.

GM will find it has a tough road ahead as it tries to keep its union, union employees, and shareholders happy.

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