Iran's Desperate Gamble to Push Oil Up to $200

As this tumultuous and volatile year draws to an end, it’s time to turn your thoughts to 2012. What will the new year bring…and what can you do to prepare for it?

I’ve given it a lot of thought, drawing on my decades of market-watching experience. In the end, I came up with three predictions for 2012, one of which I will talk about in today’s article.

[ Michael also tied these predictions to three new trade recommendations, currently only available to Agora Financial Reserve members, but which we are working on making available to Whiskey Shooters for an unbelievable discount. More on this later in the week. Keep an eye out of it. — Ed.]

But be warned: While I believe these events have a very high probability of occurring next year, the mainstream media will likely disagree. Expect them to say I’m being absurd, or at the very least ascribe to them a very low probability of happening.

Let them whine — they were wrong in 2011, and they will be wrong in 2012. So these predictions will catch most investors off guard […which means you have an opportunity to buy into the matching recommendations for a relatively low price. — Ed.]

And remember, I’m not a “doom and gloom” guy. In fact, I actually hope all of my predictions do not come to fruition, as they will prove yet more detrimental to this already-anemic economy and country.

But I can’t ignore what I see…and it is my charge to find a way for you to prosper amid the coming chaos. Even if what I see isn’t 100% on the money, the plays I’ve selected should still do all right.

So sit down, strap in and prepare to be surprised, starting with my first recommendation.

It’s pretty clear that we’re going to see some sort of military action against Iran’s nuclear infrastructure, either by Israel, the United States or even NATO. Recent words from Israeli policymakers, U.S. military action and even signals from the markets made that abundantly clear.

In a pre-Thanksgiving interview on CNN, former prime minister and current defense minister of Israel Ehud Barak spelled out his country’s position:

“People understand now that Iran is determined to reach nuclear weapons. No other possible or conceivable explanation for what they have been actually doing. And that should be stopped. And under nuclear Iran, the whole region will turn nuclear — Saudi Arabia, Turkey, Egypt will have to turn nuclear. The countdown toward nuclear materials in the hands of terrorists will start, even if you take out the generation. But more than this, they will use the nuclear umbrella to kind of intimidate neighbors all around the Gulf, to sponsor terror. Try to think what happens if at a certain moment you wake up after Iran turns nuclear, three years down the stream, and you end up with a Bahrain overwhelmed by Iran — who will come to rescue? Who would have come to rescue Kuwait when it was taken by Saddam Hussein 20 years ago, if Saddam could have said credibly enough that he had three or four crude nuclear devices?”

The defense minister continued:

“It’s true that it wouldn’t take three years…probably three-quarters, before no one can do anything practically about it because the Iranians are gradually, deliberately entering into what I call a zone of immunity, by widening the redundancy of their plan, making it spread over many more sides.”

He then reiterated the time frame in which Israel has to take military action: “I cannot tell you for sure, nor can I predict whether it’s two-quarters or three-quarters. But it’s not two or three years.”

In case you couldn’t read between the lines, Mr. Barak has given us a time frame for a pre-emptive attack — sometime within the next nine months!

And that’s overt military action. The covert options may have already begun… with the United States providing a hand.

The Drone Wars

You’ve probably heard about the RQ-170 unmanned American spy plane that Iran claims to have shot down. After weeks of denial, the United States has admitted it was hunting suspected Iranian nuclear sites.

Now Iran has claimed it was able to take control of the drone during its flight, forcing it to land exactly where Iran wanted it.

Spy flights are one thing. Actual hostility would be something completely different. But the fact is that might have already started too.

Israeli newspapers declared that Israel’s war with Iran already had begun, in the form of covert action in cooperation with other groups. The Miami Herald has information backing this up.

It reports that there have been a series of “mishaps” at Iranian nuclear facilities and weapons sites. They may be part of a covert organized attack on Iran’s nuclear weapons program, according to the paper.

A recent occurrence outside Iran’s third-largest city, Isfahan, is thought to be the most-recent strike, though details on the intended target are still unclear. Intelligence officials across the Middle East say there is strong evidence that an explosion at a sprawling military base and nuclear facility outside Isfahan had done some “significant structural damage.”

But it’s not just the promises from Israel, scattered newspaper reports or signs of U.S. surveillance that indicate an attack on Iran is imminent. It’s the market indicators as well.
Consider oil prices. Logic dictates that if the global economy were slowing, the demand for oil would drop, along with its price. In fact, that’s what has been happening with most industrial commodities. But oil remains a glaring exception.

Take a look at the following charts:

The first shows the year-over-year change in oil and copper prices, and the second shows the change in both those commodities over the last 30 days.

We can see that oil prices are up 12% over the last 52 weeks and have surged 13% in the last month. But copper prices are down nearly 10% YOY and have dropped about the same amount in just the last month. As I alluded to in the last issue, falling copper prices are a signal that a global recession is just around the corner. However, oil prices are telling us that something other than just a global economic funk is in the cards.

I believe oil prices have begun to factor in the removal of the world’s third-largest exporter of oil from the market. But I think the markets are actually being too optimistic. There is much more at stake here than the 2.2 million barrels of oil that Iran exports each day.

If you know Middle Eastern geography, you know Iran sits alongside the Strait of Hormuz, a narrow body of water that connects the Persian Gulf to the Arabian Sea and, ultimately, the Indian Ocean.

Oil tankers from Bahrain, Iraq, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates all travel through the strait. In fact, 33% of the world’s tanker traffic and a mind-blowing 17% of the world’s oil pass through the strait.

So with just a little effort, Iran could effectively block nearly one-fifth of the world’s oil supply. And the country knows it.

This is not speculation. This is 100% fact. As Fox News reported, Parviz Sarvari, a member of the Iranian parliament’s National Security Committee, recently warned, “Soon we will hold a military maneuver on how to close the Strait of Hormuz… If the world wants to make the region insecure, we will make the world insecure.”

Wall Street cannot ignore that threat much longer. The increasing likelihood of an overt attack on Iran will not make the situation any better. Remember that when Saddam Hussein invaded Kuwait in 1990, oil prices doubled. And that was just a fraction of the world’s oil at stake, compared with what closing down the Strait of Hormuz could mean.

But even if the world manages to avoid a confrontation with Iran, there are other reasons to have exposure to rising oil prices in your portfolio next year.

For one thing, there’s still the ever-present proclivity of global central bankers to print unlimited amounts of money. After all, oil has traditionally been a fairly good hedge against inflation. Remember back in the late ’70s when gold and oil prices soared together when the Fed under Arthur Burns sent inflation to 15%.

But couple Fed chief Ben Bernanke’s love affair with counterfeiting, er, creating new cash with the credible threat of oil shortages, and you can clearly see why owning oil-producing stocks may be a great asset in 2012.


Michael Pento

The Daily Reckoning