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Why Oil Could Easily Top $100 a Barrel This YearBy Matt Badiali, editor, S&A Resource ReportWednesday, April 21, 2010 For the past several months, I've been calling the nuclear problem with Iran the "biggest damned if you do, damned if you don't" situation in the world.
Iran wants nuclear weapons... the U.S. and Israel do not want it to have nuclear weapons.
The U.S., of course, could destroy just about anything it wants in Iran. But Iran's trump card – and a huge risk to your portfolio – is the most important waterway in the world... the Strait of Hormuz. Nearly 40% of the world's daily oil consumption and 65% of the oil produced in the Middle East flows through the narrow, 29-mile-wide channel.
Iran sits over the Strait of Hormuz like New York City sits over the Hudson River. And most experts on the region believe Iran could – through missiles, mines, boats (or a combination of all three) – cause significant disruption to the strait's oil flow. This would easily send oil into the triple digits... and it's why the latest developments from the region should have you reaching for my favorite "oil insurance" stocks...
Last year, British Petroleum and India's Reliance Energy cut off gasoline supplies. The three largest oil traders in the world, Vitol, Glencore, and Trafigura, all stopped selling gasoline and diesel to Iran about three months ago. And last month, oil major Royal Dutch Shell did the same. The most recent addition to the group was Malaysia's state oil company Petronas. That cuts off nearly half of Iran's refined product imports – over 130,000 barrels per day.
Another major news story here: Last week, Chinese President Hu Jintao and President Obama met at the White House. At the meeting, China received private assurances it would get all the oil it needed if it supported sanctions against Iran.
This is a big development. China has long been a defender of Iran. It has hundreds of billions invested in Iranian exploration and production. It even received 12% of its 2008 oil imports from Iran. China coming over to the side of the U.S. tells us the "more sanctions" crowd is growing more powerful.
The world is constricting the flow of out of Iran... and the flow of gasoline into Iran. (Iran consumes a tremendous amount of gasoline.) In today's world, cutting a nation's fuel supply is a highly belligerent act.
In 2008, the peak price of $147 per barrel came when Iran tested long-range Shahab missiles near the Strait of Hormuz. The missiles could easily reach Saudi Arabia and Israel.
Iran understands the value of theater in the framework of global negotiations. I expect the country to pull some sort of scare tactic this summer. That's Iran's only real strength – its ability to cause pain through the oil price. Expect it to remind the world of that power sometime soon.
The world doesn't want a nuclear Iran. And we also don't want another shooting war in the Middle East.
As I told DailyWealth readers last month, "The potential solutions to this problem on the table right now are: 1) The U.S. attempts to knock out Iran's nuclear capabilities. 2) Israel attempts to knock out Iran's capabilities. 3) We bluster and clench our fists, then ultimately allow Iran to have nuclear capabilities."
I believe the situation will be handled peacefully. But when I consider some mainstream U.S. newspapers are calling for outright war against Iran, I know investors must own some "oil insurance" – something that will buffer portfolios from the pain of a sharp oil spike. My favorite option is buying safe oil assets far away from the Middle East and its problems.
As I wrote in DailyWealth, a great option here is Canada's tar sands. There's no mystery to these deposits and no need for traditional exploration. The bitumen is there in the ground... not miles offshore and miles below the sea. Plus, Canada is a politically stable country that shares a border with the greatest military power on Earth.
Another fantastic choice is a company I've praised several times in Growth Stock Wire: ExxonMobil (XOM). The giant oil company is one of the largest and best-run in the world. Shares are cheap... trading near their 52-week price low. Its oil comes from all over the world: tar sands in Canada, offshore Brazil, and Africa. It's the embodiment of safe oil.
Good investing,
Matt Badiali
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