Will Oil Hit $300 A Barrel in 2010 Due To Mid-East Tensions Part I

[bhramos]

Will Oil Hit $300 A Barrel in 2010 Due To Mid-East Tensions Part I

While I am very reluctant to provide short term forecasts on area such as commodity prices or stock prices, I have a strong opinion about future oil prices. I am confident in my prediction because huge oil disruptions might occur due to tensions in the Middle East this coming year. I strongly believe that the media, politicians and investors do not realize the severity of situation. I think the coming year can see geo-political events that may cause the price of oil to skyrocket from current levels. While I think oil prices are currently over-priced, tensions in the Middle East could increase that will cause oil spikes this coming year. These Middle Eastern tensions are related to the current actions of the Iranian government.

There have been growing tensions between Iran and many other countries in the region. Although the media has been covering them, I do not think the media realizes the severity of these recent events.

Yemen/ Saudi Arabia

The media completely ignored the severity of the situation of Yemen until it was revealed that the recent terror attempt on a US bound airline was planned by Al Qaida in Yemen. However, I have been following the situation in Yemen for nearly a year, and I am astonished by how little attention it gets in the media.

For several years the government of Yemen a Sunni country has been fighting a civil war with Shia rebels who are trying to challenge the Government and introduce a shia country with an Islamic radical agenda. The rebels are heavily backed with moral and military support from the Iranian Government. The Government of Yemen is very weak and poor, and therefore is unable to exercise full control over the country. The situation is so bad that the last Jews in Yemen who have been there for over 3,000 years have been forced to leave in the past few months due to violence from the Shia rebels. The situation is deteriorating so rapidly that the Saudi (Sunni) Government has sent its military into Yemen to help the Yemeni Government. There have been reports that many Arab Sunni countries including Jordan, Morocco and Egypt have sent commando units to Yemen to help the government. The US is also helping Yemen financially and militarily to fight the rebels. The ultimate goal of Iran is to impose a shia Government that will be obedient to it. While Yemen does not have much oil a collapse of the government could have a large impact on oil prices. Iran’s main goal in defeating Yemen would be to overthrow the Saudi Government which is the largest producer of oil in the war. Even though Saudi Arabia has a majority Sunni population, if the Government collapsed Sunni Al Qaida extremists could take over who will align with the Shia government in Iran.

Assuming Iran overthrew the Yemeni Government, and not the Government of Saudi Arabia, it would be able to halt traffic traveling through the Suez Canal, which is a major shipping route. All Yemen would have to do is block off a small area off its coast and it would cripple all shipping going through the Suez Canal.

Egypt

Egypt is another country that feels severely threatened by Iran. Egypt uncovered a cell of several dozen Hezbollah operatives in the country several months ago planning terrorist attacks on Egyptian targets. Hezbollah is a shia organization that is heavily backed by Iran. Egypt and Iran have had been enemies for many years. Iran has a street named in honor of the assassin who murdered former Egyptian president Anwar Sadat.

However, recently tensions have been escalating further. Egypt has accused Iran of planting terrorist cells in Egypt to create chaos and try to topple the Government. Although Egypt is a Sunni country there is fear that Iran could align with the Sunni Muslim brotherhood that would be willing to team up with Iran despite their different sects in Islam. Like Yemen, Egypt is not a major oil producer however it is in very strategic location. If the Suez cannel which Egypt controls would be closed to traffic it would cripple international shipping and could lead to higher oil prices.

Below is a map of the Middle East. As clearly shown in the map the coast of Yemen and the Suez Canal can easily be blocked off if the Iran is able to overthrow either Government .

Will Oil Hit $300 A Barrel in 2010 Due To Mid-East Tensions Part I -- GuruFocus.com

 

[bhramos]

Will Oil Hit $300 A Barrel In 2010 Due To Mid-East Tensions Part II

An Iranian/Iraqi War

Another area of conflict that has not received much attention by the media is the recent tension between Iran and Iraq. Few people grasp the severity of the escalating situation. Several weeks ago Iran seized a small oil well in Iraq which Iran claims is part of its territories. Several days’ later Iranian troops withdrew without giving an official explanation. However, due to the weak international response Iranian troops returned to the area several days ago and now show no signs of backing off. While the oil well itself is small and insignificant, the chance of an Iraqi and Iranian war is frightening. Iraq and Iran fought a long and bloody war in the 1980s which resulted in over a million deaths. According to the Iraqi government, Iraq has largest proven oil reserves in the world. As shown below most of Iraqis massive oil fields (especially in the southern part of the country) are located very close to the border with Iran . If there is an invasion by Iran this could lead to huge disruptions in the Iraq’s oil production.

Potential Israeli Strike on Iranian Nuclear Facilities

This story that has gotten the most attention with regards to Iran. Pundits in the media are debating back and forth every day whether Israel will strike Iran. While, I am not privy to any intelligence information, my opinion is that Israel will strike Iran’s nuclear facilities this year. I make this statement as someone who has spent many years in Israel, has close family in the country and I know people who are in the military. There is a bi-partisan consensus across the Israeli public that Iran cannot be allowed to obtain Nuclear weapons. There is no way Israel can allow a country which has threatened to wipe it off the map to obtain nuclear capabilities. In addition Iran has been sending massive shipments of weapons to terrorist organizations that are threatening Israel. Iran is a major supporter of Hamas in Israel’s south and Hezbollah in Israel’s north. If Iran went nuclear this would provide these terrorist groups a nuclear umbrella. The deadline to strike Iran is running out, and soon Iran will reach the point of no return when it will be too late to stop their nuclear weapons program. There is growing speculation that even if the US will not help Israel, Europe will join in an Israeli strike which would set back Iran’s nuclear by several years.

Iran has threatened to close off the straits of Hormuz if attacked by Israel. The strip is only a few miles wide and is strategically located. As the map below shows cutting off the straits would prevent oil from flowing out of Southern Iraq, parts of Saudi Arabia, Kuwait and many oil rich Gulf States countries. 40% of all seaborne oil shipments travel through the straits. The US could not allow Iran to close the straits and this could create a full scale war with Iran. This in turn would further cause oil prices to skyrocket.

During the Arab oil embargo from 1973-1974 oil prices quadrupled in a very short period. While I am not an oil bull who believes in peak oil, I do believe that any of the four situations I mentioned in this article could cause a massive rise in oil prices. If all four occurred it could make the oil embargo in the 1970s look like child’s play. This situation is not farfetched. Like I mentioned, I strongly believe that there will be an Israeli (or join Israeli /European) strike on Iran in 2010. This could lead to Iran retaliating by closing the straits of Hormuz, invading Iraq, and further trying to overthrow the Governments of Egypt, Yemen and Saudi Arabia. If this were to occur it would be realistic for oil to more than quadruple from $80 a barrel to well over $300 a barrel.

Clearly the situation is extremely volatile in the Middle East. Iran is becoming an increasing important and destabilizing player in the region. I think that any one of the four scenarios above would cause oil prices to increase to such high levels that it could cripple the fragile US economic recovery. If oil prices rose over $300 it would completely cripple the world economy. At this point, the best hope would be for a peaceful and democratic revolution which overthrows the mullahs of Iran. If this were to happen I think we could see a dramatic decrease in oil prices. I hope the people of Iran get the democracy they deserve and my $300 prediction never comes true.

Will Oil Hit $300 A Barrel in 2010 Due To Mid-East Tensions Part II -- GuruFocus.com

 

[Sabir]