BE PREPARED FOR A WAR ESCALATION IN THE MIDDLE EAST, BUY GOLD AND SELL THE NASDAQ
In our post FORGET NORH KOREA, THE NEXT WAR COULD BE IN THE MIDDLE EAST, we highlighted the high probability of a war in the Middle East and the determination of the Trump administration to bring under control the regional ambitions the Islamic Republic of Iran.
In the past week, exchanges of tweets and declarations have highlighted the determination of both sides not to give up ground in the historical power struggle that is taking place in the Middle East.
The decision of the US to pull out of the Iranian Nuclear accord and to reinstate hard-hitting sanctions on May 12th 2018 has cornered Iran politically and economically.
The White House’s is clearly hoping to suffocate the Iranian economy. and foment enough economic frustration in Iran to set regime change in motion, or at least to bring the Islamic regime to abandon its regional ambitions in Yemen, Iraq, Syria and Lebanon.
Since May 2018, The Iranian Rial fell from 30'000 to 90'000 on the black market, triggering massive inflation and demonstrations in many parts of the country.
While a regime change remains a long shot for now, Iran is facing a higher risk of confrontation with the United States as it comes under internal pressure to walk back its commitments on the nuclear deal.
Initially, Iran thought that it could isolate the USA and stay in the nuclear accord with Europe, Russia, China and the other countries with which it does trade, but most international companies, including Chinese corporations, have been reluctant to pursue this avenue.
The truth is that although most nations of the G7 are willing to stick to their commitments and prefer Iran’s nuclear program to remain under control, none of them is actually in agreement with Tehran’s multi-decade policy of destabilizing the Middle East and the Arab World.
Yemen has been transformed into a humanitarian disaster, the Iraqi people clearly rejected Iran’s influence in the May elections that favored Iran’s strongest Shiite opponents, in Syria, Israel is fighting a daily war against Iran’s and Hezbollah’s military presence, with the blessing of Russia, and in Lebanon, the recent push of Hezbollah in the May 6th election was less convincing than expected and the inability to form a Government for the past 2.5 months is bringing the country and its banking system on the verge of collapse.
As we highlighted several times in our various posts, Donald Trump’s objective is not the nuclear accord itself but the containment of Iran’s international policies.
Donald Trump’s strategy is not without merits though, and Iran’s Mollahs regime is feeling the heat. But it doesn’t look like it will take US sanctions or losing its proxy wars in Yemen, Syria and Lebanon sitting idle.
The exchange of bird’s names between Rouhani and Donald Trump last week indicates that Iran may be on the verge of escalating the conflict in a desperate attempt to force its way through.
On the political front it is likely that Iran will soon announce its unilateral withdrawal from the Joint Comprehensive Plan of Action, and re-start its nuclear program. In its view, this will give it a bargaining chip — and probably the only one it has — in an ultimate negotiated settlement.
However, Irans is taking a huge risk in doing so. Israel is ready to strike militarily right at the heart of Iran itself and Donald Trump has clearly articulated that such a decision would be considered as a strategic threat to the USA itself.
Iran’s Ayatollahs may be mis-calculating the resolve of both Israel and the USA or they are so desperate that they feel they have to do something drastic to keep the support of their own population. Being attacked is probably the best way, in their view, to unite the nation behind the regime.
On the regional military front, it seems that Iran ordered Yemen’s Houthis rebels to launch attacks on oil shipment routes in the straight of Ormuz, with the purpose of creating oil supply instability that will reverberate around the world, and drive oil prices to the roof.
Reuters reported today that Brent crude led oil prices higher, extending gains into a third day after Saudi Arabia suspended crude shipments through a strategic Red Sea shipping lane.
Iran’s strategy may be to drive oil prices through the roof by disrupting the supply chain and inflict a new oil crisis on the western world, hitting their economies with an inflationary shock, falling bond markets and collapsing stock markets.
Saudi Arabia, the world’s biggest oil exporter, said today that it was temporarily halting all oil shipments through the strategic Red Sea shipping lane of Bab al-Mandeb after an attack on two big oil tankers by Yemen’s Iran-aligned Houthi movement, according to Reuters.
Iran’s President Hassan Rouhani threatened last week to restrict shipments through bab al-Mandeb where over 5 million bpd cross on a daily basis. The Bab al-Mandeb Strait, where the Red Sea meets the Gulf of Aden in the Arabian Sea, is only 20 km wide and most exports from the Gulf that transit the Suez Canal and the SUMED Pipeline pass through Bab al-Mandeb strait.
Responding to U.S. threats to bring Iran’s oil exports to a halt, Rouhani warned the United States on July 22 “not to play with the lion’s tail,” saying the U.S. would regret the consequences including “the closure of many straits”.
Saudi Energy Minister Khalid al-Falih confirmed in a statement that the Houthis had attacked two Saudi Very Large Crude Carriers in the Red Sea on Wednesday morning, one of which sustained minimal damage.
According to the Financial Times, the suspension of oil shipments will slow the delivery of crude to two of Saudi’s key markets in Europe and North America at a time when oil markets are already jittery due to tightening supplies and rising geopolitical risks.
Each tanker, operated by the Saudi National Shipping Company, Bahri, was carrying 2 million barrels of crude produced by state energy giant Saudi Aramco when they were attacked by Houthi militia, according to Falih.
Reuters recently detailed how Iranian military operations could interrupt the oil supplies passing through the Strait of Hormuz: 18 million barrels of oil per day, or about 20% of the world’s supply.
A chain reaction on oil prices could then unfold. In the event of an Iranian blockade or war in the Strait of Hormuz, it is likely that the US Congress would again ban exports, in which event consumers would face shortages and higher prices.
As our readers know, we have always advocated that Oil prices had no fundamental reasons to trade as high as they are today, or even go higher. However, price manipulation and supply disruptions could lead to a spike in oil prices that could have major consequences on the world’s financial markets.
One thing is for sure, Donald Trump and Israel are not going to let Iran off the hook and are determined to use every weapon at their disposal to weaken , and if possible, eliminate the Iranian Islamic regime.
We may be much closer to one of those “black swan” events than anyone thinks.
Very few forecasters have taken the build-up of tensions in the Middle East seriously and there is nothing more dangerous than a dogmatic regime that is feeling threatened.
Our recommendation to investors is to take advantage of the current weakness in Gold to build positions to hedge their global portfolio and to lighten up considerably on US technology and Small cap stocks.
Originally published at Mechelany Advisors.
