Oil Surge, Weak Stocks, and a Potential Turn for Gold

With intermittent internet up north where we are, we thought we’d keep it simple and note the story of the week. That story is, of course, the resumption of hostilities between Iran and the U.S. and once again the shutdown of the Strait of Hormuz. Both sides were claiming they are shutting down the strait and both sides indicated passage will only be allowed with a fee.

The U.S. soon backed off that as many claimed that once again the TACO man (Trump Always Chickens Out) came and renounced that the U.S. will not charge a toll. That could, of course, change by next week as well as an announcement that we are week away from a deal. One thing we know is that Trump does not like higher interest rates, a lower stock market, and higher gasoline prices at the pump. That was quickly threatening to become the case once again.

The trouble is, if the closure of the Strait of Hormuz was the only threat, then that might be it. However, that is not the case. The Russia/Ukraine war is escalating and Ukraine is targeting Russian oil refineries. Russia ranks third in the world for oil refining capacity. Russia is also the world’s second largest oil producer and holds the world’s eighth largest reserves. Any cutback in Russia could have global consequences for the price of oil.  Diesel fuel in particular is vulnerable and already prices are rising.

The second big threat is the Houthis of South Yemen who have the capability of shutting down the Bab el-Mandeb Strait, the narrow waterway that links the Red Sea with the Gulf of Aden. Saudi Arabia has a pipeline that goes to the Red Sea and exports a considerable amount of oil through the el-Mandeb. The Saudis ship 4-5 million barrels of oil to the Red Sea that then has to be transported through the el-Mandeb to Asian ports. The

Saudis only ship 2–3 million barrels of oil through the Strait of Hormuz so a shutdown of the el-Mandeb would be significant

This could all quickly escalate and the world would develop an oil supply problem, much of which would impact the EU and Asia. China has cut back, but it is not enough to make up the loss from what comes through the Strait of Hormuz or the el-Mandeb. Add in a potential large cut in Russian oil and you have the makings of a larger crisis. Some analysts believe it could spark oil to go to $200/barrel. But that’s an extreme.

Nonetheless, the fact the situation is deteriorating could soon send WTI through $90, a price that we’d consider a significant breakout. Brent has to get through $98. We are putting in what appears to be a V bottom for WTI. Naturally, we can’t confirm that until we break the points noted above. Meanwhile, the markets are reacting and stocks, led by semiconductors, are falling as is gold, supposedly the safety hedge. Inflation fell in June, thanks to sharply lower oil prices, but with oil prices rising the relief could be short-lived. The wild card is the TACO man.

For the record WTI oil rose 15.4%, Brent crude was up 15.8%, natural gas (NG) was down 0.7% But EU NG that is more impacted by the events in the Mid-east rose 21.5%. The ARCA Oil & Gas Index (XOI) was up 7.5% while the TSX Energy Index (TEN) rose 3.8%.

The stock market could just be beginning a larger decline whereas gold and the gold stocks appear to be under accumulation.

Markets and Trends

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(Featured image by Scott Tobin via Unsplash)

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