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Much attention has been giving to Trump's recent build up in Iran, pushing up oil to nearly $70/b. This is an overreaction as it ignores Trump's typical playbook, near term geopolitical headwinds, and the fundamental change in oil producing nations.
**Iran - a classic example of the TACO trade**
I don’t understand how people have forgotten this isn’t new, Trump struck Iran just 6 months ago. His response was carefully crafted in order to claim victory, but minimise escalation. Accordingly, oil markets dropped the risk premium.
Apply this to today, two likely situations can occur:
1. No strikes:
Trump doesn’t strike at all, instead claiming victory over Iran through diplomacy, in which Iran gives moderate nuclear concessions in exchange for sanctions relief. Oil prices return to $60/b
2. Moderate strikes mirroring strikes in June:
Trump performs strikes on military bases, carefully crafted for minimal long term escalation. Risk premium erodes, oil prices gradually return to $60/b
The potential for full scale war is incredibly low, both sides have too much to lose. War with America would bring chaos to Iran, with the likely deposing of the Ayatollah. With the closure of the strait of Hormuz, which analysts have tipped to increase oil to $120/b, this would amount to political suicide for Trump right before midterms in November. He is already unpopular and holds the house by a razor thin margin. In order for rate cuts to continue he needs energy costs to continue to decline, which have been significantly offsetting the inflationary impact of tariffs. He was elected on a platform of “No new wars” and ending inflation. Trump knows the American voter is unforgiving when it comes to the economy, and the memory of the chaos of the Iraq war has not been forgotten.
**Russia Ukraine war- the inevitable end**
The resolution to the Russia Ukraine war has recently fallen out of the headlines, but the potential of large scale return of Russian commodities to the market has not stopped in looming over the market. The war will end soon, this isn’t speculation, both sides are in precarious positions. Firstly, Russia faces a looming economic crisis based on a serious deterioration in government budget, high inflation and a severe manpower shortage, all precursors to economic collapse. Vladimir Putin will not have forgotten to memory of the Afghanistan invasion, and the deep rift it left it left in Soviet society as soldiers came home, prolonging the Ukraine war will only extend the economic malaise. Secondly, whilst Ukraines resistance has been impressive, it is becoming increasingly untenable. Ukraine is highly dependent on Western support. American funding is gone, and European government are facing the rise of the populist right, who run on platforms of removing funding for Ukraine. Ergo, a current position of relative strength for Ukraine is best placed for negotiations.
Some may point to sanctions being slow to unwind, and the unlikely event of Russian oil returning to Europe, in which I do see some credence to. Yet i see this as moderate compared to the overall impact the end of the war will have. Without the threat of secondary sanctions, large parts of Asia and Africa will welcome back Russian oil, which will be refined and sent to the West. Plus, one of the most openly transactional and Pro Kremlin administrations is in office, its hard to believe sanction reductions will not be quickly reduced in order to gain benefits of lower oil prices. Even Europe will likely see a moderate return to Russian oil, as more pro Russian governments, and the rise of the populist right, can facilitate the return of Russian oil. Wouldn't be surprised to see $50/b, at the announcement of the end of the war.
**OPEC - A group of self interested parties**
By far the biggest weight on the oil market has been OPEC, with supply increases contributing to an oil glut. This has exposed the true weakness of OPEC, as Saudi Arabia has chosen to punish nations that have been exceeding quotas, such as Kazakhstan and Iraq, showing a group of self interested nations, rather than a coalition of price colliding nations. OPEC has waned in importance, as its core structure has fractured. A change in America to become a net energy exported has further eroded OPEC's global importance, which leads me to believe a further reduction in the risk premium for oil is inevitable .
**Net Zero - Dead in the West?**
A large amount of attention has been given to the large decline in carbon reduction initiatives in mainly America, but also large parts of the West. Donald Trump has repeatedly lambasted many renewable energy sources, whilst promoting fossil fuels. Instead of looking at his comments, I think it is better to look at policy.
If you look at the Big Beautiful Bill, whilst it did reduce incentives for renewable energies, it provided a clear regulatory framework for energy under the Trump administration, and retained incentives for nuclear energy. The recent blocking by the supreme court of the Trump administrations efforts to stop Wind farm projects has given an indication of the new energy landscape. Renewable energy will permitted, but fossil fuels will retain their position in the American market.
Even outside America, this trend is repeated across the world. Looking at nation like Australia, even as it has promoted climate targets and renewable energy, it has quietly continued to approve new gas fields and coal mines. A large reduction in fossil fuel supply is not coming.
What does this mean? It shows that renewable energy will only continue to grow, weighing on oil demand, which will not be offset by supply reductions due to regulations.
**What you have all been waiting for - how do you profit?**
Now that we have established the long term bearish trends in oil, how do you position yourself for maximum profit.
I would avoid options as this is largely difficult to predict timeframes, but Iran risk premium erosion can be profited on. American oil companies are grossly overvalued, with most trading at P/E ratios of 28x, compared to the usual \~16x, therefore puts could be utilised, but would prefer shorts to minimise risk with timeframes.
Looking at long term trends, we can pivot to companies that have the most to gain from oil price reductions. Personally, I am positioned into airline stocks, which a large part of their cost basis is jet fuel costs, which will benefit from reductions in oil to below $60/b, and lower rates boosting consumer spending. Yet, consumer cyclicals as a whole stand to benefit.
**TLDR:**
**Oil is largely overpriced based on market short term issues, whilst ignoring long term trends. Oil stocks are overvalued whilst consumer cyclicals stand to benefit.**
EDIT:
If Trump actually starts a full scale ground invasion of Iran, ban me.