Oil War 101

This guy is selling subscriptions but I tend to agree with his synopsis about where we are potentially heading.

Oil War 101

The Stage is set for the Next Great Conflict of the 21st Century

‘War is not good for anything, anything at all, except commodities...if there’s going to be a war, it usually means commodity prices go higher.’
Jim Rogers, the world’s greatest resource investor
By Jason Stevenson, Resource Analyst
Dear Reader,
It’s December 2002...and global tensions are heating up.
US President, George W Bush is in the White House studying maps of Iraq.
He’s just told the American people his plans to ‘disarm Iraq of weapons of mass destruction, to end Saddam Hussein's support for terrorism, and to free the Iraqi people.’
John Howard, Australia’s longest serving Prime Minister, is sipping his coffee in the Lodge. In a coalition with the US and the UK, Howard is just about to commit Aussie troops, warships and planes to Iraq.
Meanwhile, United Nations (UN) inspectors are based in Baghdad looking for ‘Weapons of Mass Destruction’. Iraq’s President, Saddam Hussein is in one of his many palaces denying these weapons ever existed.
Fears of all-out war with Iraq are rising.
And the price of one commodity in particular rises right alongside those fears.
Of course, I’m talking about oil.
Crude oil is now trading at US$27.58 per barrel. That’s up 40% from its January 2002 price of US$19.69 per barrel.
Following this price spike, and after experiencing a decade of low oil prices, few people think crude oil can go much higher.
But by February 2003, just two months later, crude oil is up another 45%. Including a ‘war premium’ of US$5–15 per barrel, it’s trading at nearly US$40 per barrel. Investors who got in early have made a tidy profit.
Check out the gains the oil majors made over the following two years...

• BP up 77%
• ConocoPhillips up 141%
• Chevron up 103%
• Exxon Mobil up 98%
• Total SA up 355%
• Woodside Petroleum up 98%

Imagine if there was a way to forecast these kinds of moves.
Well look no further.
The same global geopolitical tensions that caused oil to spike 13 years ago, are repeating today.
And I expect the price of oil to spike because of it.
The implications for you as an investor are clear. And that’s what I’ll show you in this free version of the October edition of my newsletter, Resource Speculator.
The link between conflict and oil

The January 2001 issue of The Regional Economist noted a strong correlation between the oil price and military conflicts in the Middle East.
Leading into all five major Middle East military conflicts between the Second World War and 2002, the crude oil price skyrocketed.
You can see this in the red columns in the table below:

Source: Nber.org
As you can see there is a clear and direct link between global conflict and the price of oil.
When war breaks, the risk of supply disruptions rises...and so does demand.
Therefore, so does the oil price.
The following chart explains the big moves in the crude oil price since 1970...

You can see that crude oil has always rocketed when war breaks out in the Middle East.
And, while I don’t want war any more than you do, it will be no different next time...
The Middle East power play

The Middle Eastern conflict has grown around Syria for some time now. I’ve following the course of events since September 2014.
This whole mess boils down to politics, power and money.
To kick things off, it’s helpful to know about the main players.
The governments of Iran, Iraq, Syria and Lebanon are controlled by Shi’ite Muslims. While the governments of Saudi Arabia, Qatar, the United Arab Emirates and Jordan are ruled by Sunni Muslims.
When it comes to controlling energy, these groups have historically backed their own circle. That’s important when you analyse the world’s largest natural gas and condensate field — South Pars and North Dome. It’s shared by both Iran (Shi’ite ruled) and Qatar (Sunni ruled).
Both the Shi’ites and the Sunnis want to build their own gas pipeline networks. You can see this on the map below...

Source: passionforliberty.com
The Shi’ites want to use the Iran-Iraq-Syria-Lebanon-Europe route (Islamic pipeline in red).
The Sunnis want the Qatar-Saudi Arabia-Iraq-Syria-Turkey-Europe route (Qatar-Turkey pipeline in purple).
Here’s the catch...
Both groups need to build their pipeline through Syria.
You can see why Syria represents huge strategic value.
If either the Sunni or Shi’ite groups are going to get their gas piped to Europe, they have to go through Syria.
This is where it gets interesting. A lot of powerful outside parties also have chips on the table.
Russia and China (although China remains undeclared) are on the Shi’ites’ side (supporting Assad’s Syria). They’ve voted together on every issue regarding Syria at the United Nations. On the other hand, the US has its chips on the Sunnis’ side (with their old friends Saudi Arabia).
Geopolitical games 101

For many years, the US was an ‘oil importer’ and heavily relied on cheap Middle Eastern oil.
Now, having become an ‘oil producer’, the US geopolitical goal is to isolate Russia — it’s the only country (bar China) that really stands up to US international meddling.
The US isn’t used to being told what to do. It can’t handle the fact that it’s a declining empire — economically, geopolitically, financially, and socially.
As such, you can expect the US to keep doing whatever it takes to exert its authority over Russia.
This means, hitting Russia where it hurts — cutting off its oil and gas money.
Russia is the biggest supplier of natural gas to Western Europe. This grants the county a lot of power. If necessary, it can turn off the gas or raise prices, as it has done during northern winter months in years past.
The US doesn’t like this power play, and to neutralise Russia’s influence over Europe, the US has backed the Qatar-Turkey pipeline (Saudi Arabia).
Russia clearly has an interest to make sure this doesn’t happen. What’s more, it holds long term exploration and development rights to a large part of Syria’s offshore waters.
If Russia can find gas and oil in the region AND have influence over a pipeline to Europe, it can gain more control over all the gas that flows into Europe.
There is a lot at stake here — wealth, prestige and power — for a lot of historically stubborn and confrontational nations.
Geopolitical tensions are heating up.
And all the dangerous ingredients for a Middle Eastern proxy-war are in place.
This is coming whether you like it or not

With Russia and China watching from behind the scenes, Barrack Obama has had no choice but to enforce his ‘no boots on the ground’ policy.
Over the past couple of years, the US spent nearly US$500 million training Syrian rebels to fight IS.
The US realised that this plan had failed long ago. This is why US forces conducted more than 7,000 airstrikes in Iraq and Syria over the last 12 months.
But this plan has also been a complete failure. And Russia and China kept watching on the sidelines.
Out of ideas, Obama and his mates recently pushed the Russians too far. CNBC reported that the Pentagon put ‘boots on the ground’ in Syria, assisting the Kurds on 16 September. The nature of the special operations was not disclosed.
Russia then started bombing the Islamic State on 30 September.
It took them 72 hours to do what US forces couldn’t — destroy significant Islamic State territory and personnel.
Supported by Russian airpower, Iran has now sent thousands of troops into Syria and Iraq to assist with its army’s offensive on IS. The coalition has even taken back important oil refineries captured by IS in September last year.
Meanwhile, the US military strategy appears paralysed.
The oil stock to watch

It’s likely that the entire campaign will shift to Iraq, where the Iranian military just recaptured prized oil fields.
According to the Financial Times, estimates by local traders and engineers put crude production in IS held territory at about 34,000-40,000 barrels per day.
The oil is sold for between US$20 and US$45 a barrel, earning the militants an average of US$1.5 million a day.
While, according to CNBC, the US Rewards for Justice program has ‘offered anyone US$5 million for tips on disrupting IS oil’.
But that’s hardly a long term solution. Iraq is eventually where the US will either need to confront Russia for control over the region, or simply pack up and leave.
It’s unlikely that the US will leave quietly. Especially with US relations with Russia at lows not seen since the Cold War.
That said, we should see Syria pushed into the background for a little while.
The geopolitical story is now moving to the South China Sea, where the US is deploying a number of its war ships in defiance to Chinese authorities.
If you keep following this geopolitical story, you’ll see the switches between Ukraine, the South China Sea and Syria — the three hot-spots that could erupt into a full scale war.
The world is watching who will make the first move. It will take some time before we see a full on confrontation.
Yet at the moment, the stage is being set for the next World War.
While I don’t want this anymore than you do, legendary commodities investor Jim Rogers’s puts it this way:
‘Wars start when bureaucrats make mistakes and then other bureaucrats react to those mistakes and then next thing you know, you have eight or ten bureaucrats sending 18 year old kids to kill each other, and it’s very worrisome what’s happening.’
A mistake is a real possibility. If this happens, Jim explains:
‘Having said that, war is not good for anything, anything at all, except commodities. I’m not going to say buy commodities because you don’t want to start a war, but if there’s going to be a war, it usually means commodity prices go higher.’
Indeed, it takes one mistake to send commodity prices higher.
And I’ve been watching this unfold with growing concern for some time now.
On 3 December 2014, when crude was trading at US$63 per barrel, I wrote to readers of my research letter Resource Speculator:
‘Crude oil prices won’t stay low forever. In fact, expect to see crude oil prices rocket into 2016/17.
‘As economies keep falling apart, geopolitical risk will pick up into 2016/17. You’ll see conflict and social unrest rise around the world at an alarming rate.’
But before the oil price takes off, crude is likely to fall further — hitting my forecast of US$34 per barrel by early 2016.
This should keep the oilers share prices somewhat contained.
In this case, I see no rush to buy any established oilers today — even if they look great on paper. If you buy today, you won’t be buying at the best price.
As such, I’d like to provide you with a recommendation for a top-rated oiler that you should put on your watch-list.
It’s a company you can expect to make big gains on soon...but not quite yet.
This is the best strategy to take, heading into the final stretch of the resources bear market.
You can get my full analysis on this Australian oil stock by checking out this recent issue of my investment newsletter Resource Speculator.
It’s a no-obligation deal, so you have nothing to lose by taking a look.