Oil Could Hit $200 Here’s Four Reasons Why

Everyone says something stupid at some point in their lives - it’s all part of being human.

But when that person is a minister in the Israeli Government... and that something includes the words "attack" and "Iran"...

Expect a BIG reaction.

That’s the situation Israel’s transport minister Shaul Mofaz found himself in on Friday.

His one comment caused a global panic; wiped billions off stock market valuations... and sent the price of a barrel of crude to an all-time high of $139 in one single day.

If this threat is carried out - as I believe it will be eventually - this move in the oil price will be one more hike on the way to $200.

Why Iran will be bombed eventually

Mofaz said that Israel could attack Iran unilaterally, adding that international sanctions had not been effective.

This caused the oil price to surge by $10 a barrel for contracts after January 2009.

This implies the futures market is expecting an attack on Iran by the end of this year. Thankfully, the Israeli government have moved to undo the damage.

Prime Minister Ehud Olmert’s spokesman said all options must remain on the table. A defence official also said these comments would make it more difficult for Israel to convince the international community to intensify its efforts.

Mofaz was playing politics - but he played a very dangerous political game. And even though the Israeli government moved to neutralise his comments, the bullish effect on the oil price will remain. The fear generated by his comments will take some time to unwind.

Iran is in the world’s top three holders of proven oil and natural gas reserves and it is Opec’s second-largest exporter after Saudi Arabia.

So, if the oil fields of Iran are attacked then I have no doubt that oil will hit Goldman’s infamous $200-a-barrel target.

I believe the US will bomb Iran eventually... but I don’t expect they will cause any damage to the oil fields if they can help it. Any US action against Iran will be an economic war to protect the complete demise of the dollar. It will be a desperate move.

The ‘death of the dollar’ is almost complete Iran does not accept dollars for its oil anymore, as the Iranian government have pointed out since December last year. Neighbour Iraq started to price its oil exports in euros in 2000 and Iran started to move in the same direction shortly after.

The end of US dollar hegemony in oil markets will cause the currency to completely collapse - and plunge the US even further into an economic crisis.

These moves were effectively an attack on US dollar hegemony by Iraq and Iran - and they hope to take this to a wider Arab audience to increase the damage.

On 17 February, Iran opened the International Oil Bourse (IOB) on the Island of Kish in the Persian Gulf. The IOB is a bourse trading in petroleum, petrochemicals and gas, for which payment is accepted in virtually any currency but the dollar.

Some of the major oil-producing countries such as Venezuela and a few of the larger oil consuming countries, most notably China and India, have already announced their support for the IOB.

If countries such as Russia to agree to pricing oil in other currencies too... the death of the dollar will be almost complete.

That’s why I strongly believe that the US will bomb Iran. And I think it will stay clear of the oil fields. It will bomb Kish Island instead - along with a number of nuclear facilities.

However, the big quandary for the US is "collateral damage."

Iran’s "tourist shield" The Iranians located the bourse in a very sensible place.

Kish is a resort island in the Persian Gulf. Due to its status as a tax free zone, the island attracts many visitors. Indeed, it is said to be the third most visited Western-oriented city in the Middle East, after Sharm el-Sheikh and Dubai.

So, a game of ‘cat and mouse’ is going on.

Any direct attack by the US will cause the oil price to leap and cripple a US economy that is balancing on a knife edge. It would also be politically distasteful for the most powerful country on Earth to start bombing a holiday resort. However, the outlook for the dollar is grim and Arab countries relying on petrodollars for their future must be nervous. Any sensible manager of a country’s wealth would want to diversify away from the dollar as fast as they could, without causing the currency to collapse...

But is an orderly exit possible?

Unfortunately, the US’s weak dollar policy accelerates the need for Arabic nations to move away from the currency. They’re making hay with record oil prices, but the dollars in which they are paid continue to lose value.

Like supermodel Gisele Bündchen, Arabs see the value of euro pricing... and I reckon this trend will continue.

Three more reasons why oil will continue to rocket Although I expect that ultimately the US will bomb Iran, I don’t expect this to happen this year. Even after Shaul Mofaz’s comments last week, I am not convinced a bombing raid is imminent.

The problem is that his comments have put the market on alert and there is no way to retract what he said.

On top of that we have soaring temperatures in the US causing energy used in air conditioning to jump; we have the start of the hurricane season and a hawkish European Central Bank to deal with.

Still, it makes me even more confident that we’re going to see a bumper second quarter for our targeted Smart Commodities UK oil plays.

Regards

Garry White
Editor
Smart Commodities UK

P.S. If you’d like the specifics on our oil-related investments, I invite you to review my Smart Commodities UK service for three months on a no-obligation trial. Visit here for all the details.

P.S. If you enjoyed this article then sign up for Smart Commodities UK. It’s dedicated to searching out the investment trends that could provide our biggest profit opportunities for the next decade…

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Oil Could Hit $200 Here’s Four Reasons Why

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Oil Could Hit $200 Here’s Four Reasons Why