Update and thoughts on Hormuz situation
And one new idea
One new idea and some updates on current ideas.
Let’s start with the elephant in the room: Closure of the strait of Hormuz. I think this is a non-event and a no-brainer opportunity to load up if you are focussed on the medium to long term (say 6-12 months+ out). Only issue might be timing, so I did move to some cash (sold Inmode, Directa Sim, Humble group and ICCC) as they were my weakest positions.
I have seen some panicking about this and the best argument against panic is that you would need Iran, a $400 billion economy who is massively underperforming expectations in the war so far, to basically nuke the global economy. And that somehow militaries with a budget larger than Iran’s GDP will find no way to actually get those tankers through.
Some observations:
Trump isn’t gonna TACO his way out of this. He can pull out, but that will only worsen the situation. Iran has to TACO basically.
I think oil might briefly spike to $200+ before this is over. As clearing the strait will probably not happen before early April.
The market kind of trades like an option here. Stocks are slowly going down, oil is slowly crawling upwards everyday this is not resolved. The moment it is resolved (either a deal or strait is effectively cleared) oil will crater down, and the market will spike upwards.
I have seen posts about how ⅓ of global urea supply has to go through the strait. Except it is more like 9% of global production. About 18.5m tons with 200-240m tons of global supply.
Oil stocks are just as/more expensive than in the 2022 peak. Petrobras is trading far above its 2022 peak, most of US shale producers are trading near 2022 peak levels, you would really need several years of $90-100 oil to see modest upside here. I remember buying Petrobras preferred shares in late 2022 for $9 and I got $3 of dividends within a year, now they are at $17 with a lower dividend payout rate.
A similar % of oil went through the strait during the Iran-Iraq tanker wars in 84-88 in which over 200 tankers were struck. Iran also attacked Saudi and UAE ships back then. It barely seemed to have affected oil prices (not inflation adjusted) and US only intervened in middle of 88:
The US has become A LOT better at these bombing campaigns. They had real problems finding even a minority of Iraq’s SCUD launchers in the first Gulf war in 91 even with spec ops teams on the ground. But have no problem now taking out Iran’s BM launchers with over 70% taken out so far.
If the IRGC is rational they put a reformist leader in place and pledge no nukes, no ballistic missiles. Trump would accept that and force Israel to back down. If they do this before the US manages to open the strait of Hormuz, they have some leverage (threat of a future closure) and can stay in power. If the US manages to open the strait the IRGC loses all leverage and this likely becomes background noise and Israel/US will try to continue until IRGC + Basij is completely hollowed out.
Unlike Libya or Afghanistan or even Iraq there are actually functioning state institutions + army and a fairly unified country humming below the IRGC + Basij oppression system. So I actually have good hopes that Iran can recover nicely here if those 2 organizations are hollowed out.
When this is over, Gulf states will build pipelines to bypass the strait and get better missile defenses. So again, IRGC has some room to make a deal here, but in 2-3 years will have lost most/all their leverage.
Global supply of crude that has to be rerouted is also a lot less than 20mb/day. Actual crude is like 15mb/day, of which:
1.5mb/day of Iranian crude
5mb/day rerouted through various pipelines
Probably 1mb/day of supply elsewhere in the world can be added within 3-6 months
Another 1mb/day of demand destruction at $100+.
So the real amount that has to be squeezed through is about 6-7mb/day.
1 VLCC is 2mb/day (probably a bit more complicated though as there are a wide variety of oil + product types that cannot fit all into a few tankers).
That said there is some tail to IRGC’s missile launches:
Shooting down Shahed drones in a cost effective way is already a solved problem.
The IEA countries have 1200mb, China has 1300mb of crude reserves. Probably another 1-2000mb/day in the rest of the world in crude reserves. Throughput might not be high enough to backfill that 6-7mb/day though.
Asia gets ~80% of oil that flows through Hormuz. You would think that holding a gun to China’s (Asia in general) head on this would be a bad idea for Iran strategically.
Greek shipowners have also snuck 10 oil tankers through so far.
In 2019 dollars, oil is currently sitting at only $75/barrel. January 2027 futures sit at about $55 in 2019 dollars.
The oil futures market is possibly manipulated though. So if you want to bet on this, just buying Brent futures would be the best way. The problem is that it is fairly likely something will be negotiated/done in the coming weeks and your futures gap down to $70.
Iran closing the strait has been war gamed for decades. So take all those claims that this caught the administration off guard with a very large pinch of salt.
In the medium term, Argentina, Venezuela and possibly a free Iran will increase production by millions of barrels/day while 1000km EVs cheaper than ICE cars are in the pipeline. So I don’t see how anyone can be bullish on oil beyond the next 12 months.
That is my 2 cents, I don’t see any attractive ways to bet on this other than just buying stocks that are now getting cheaper because of this. My strategy has been to sell down stocks that I found less attractive and slowly get fully invested in the coming weeks. The best time to buy oil stocks in 2020 was when oil went negative. The best time to buy euro stocks was in 2022 when inflation was peaking.