Keith Kohl's take on war between Israel and Iran - Oct 3

[dan_s]

Oil Spikes as War Approaches, What's Next?
Keith Kohl | Oct 03, 2024

There are a few names that you may want to become acquainted with.

Names like Ahvez, Marun, or Aghajari aren’t known to most people outside of the oil industry.

To the average person, the names are meaningless. At least, they are until someone informs them that together, these three oil fields hold more than 140 billion barrels of oil beneath the surface.

They happen to be the three largest oil fields in Iran… and might be stealing a little more attention in the days and weeks to come.

In fact, the Ahvaz field alone is the third largest field in the world and has been pumping out crude from the ground for roughly 70 years.

When I told you a few weeks ago that the Middle East was a powder keg waiting to ignite, I wasn’t kidding.

Except, this time it feels a little different.

Unless you’ve been hiding under a rock for the last 24 hours, then you undoubtedly saw the latest escalation in the Middle East.

But if you’ve been following these tit-for-tat retaliatory strikes all year, then you know that this one didn’t have quite the same feeling to it.

When Iran struck Israel directly last April, they used hundreds of slow-moving drones that were picked apart by missile defense systems. Iran even gave us a head’s up that the attack was coming, which is one of the reasons why it was so ineffective.

On Tuesday, however, no advance warning was given to the United States when a couple hundred ballistic missiles were launched at Israel.

Although this attack was also generally ineffective due to Israel’s superior missile defense, it was certainly enough to spook the oil markets — WTI prices spiked immediately after the attack, jumping nearly 8% higher throughout the day.

You see, what’s shaking oil investors wasn’t necessarily the missile strikes themselves, but rather what Israel’s response will be.

There’s really two targets that Israel has in mind, and both would send crude rocketing higher again.

Nuclear or oil, go ahead and take your bets now.

If you remember, Israel’s response to the April 13th drone attack was a pinpointed strike at Iran’s advanced air defense system, which was located 100 km from the Natanz enrichment complex, and just 20 km north of the Isafahan Nuclear Technology Center.

Given the escalation that has taken place since, I don’t think it’s likely that Israel will hold back again by going after a defense system.

Thing is, crippling Iran’s oil infrastructure wouldn’t be too hard… and they wouldn’t even have to hit those three massive oil fields I mentioned.

They just need to take a page from history.

Just a few miles off the coast of Iran lies a continental island called Kharg. Located on that island is an oil terminal that controls more than 90% of the country’s oil export.

By the way, it wouldn't’ be the first time that Kharg would be targeted. Saddam Hussein bombed it during the 1980s when the two countries were at war, destroying most of the facilities on the island.

Close your eyes for a moment and imagine what would happen if Iran’s exports were taken off the table. Not only would there be a critical revenue stream lost for Hezbollah, Hamas, and other proxy militias bolstered by Iran like the Houthis, but it would cause unprecedented turmoil in the precarious supply/demand balance. < Much higher gasoline prices in the U.S. would likely ensure that Trump wins the election.

We’re not talking about having Iran simply sell its oil on the black market; taking out the Kharg Oil Terminal would cripple Iran’s oil industry.

You have to wonder if this would be enough to count as the “painful response” that Israel has already promised.

Then again, the next logical question to ask yourself is whether or not a move like that would finally be the straw that breaks the camel’s back in the Middle East.

Personally, I’d rather not wait to find out.

In the case that Israel decides to target Iran’s oil infrastructure, it puts an even heavier burden on oil output outside of OPEC. Remember, right now the bulk of global spare capacity can be found within OPEC members.

As much as the headlines want to highlight that U.S. oil production is just shy of all-time highs, there are some sobering facts that are conveniently left out.

In July, crude production in the U.S. was around 13.2 million barrels per day. Contrary to most headlines, growth has been flat for most of 2024. < U.S oil production has declined since December, 2023. It declined from June to July, which is the most recent month we have production data for. At the current active rig count there is very little chance that U.S. oil production will get back over 13.3 million bpd by year-end.

Nobody is expecting another surge in output.

Today, the oil game has shifted to a new mantra: Pump more with less.

Gone are the days of the Texas oil gushers. The real investment gems in the oil patch are the drillers that are becoming more efficient when it comes to drilling their wells.

And some are a step ahead of the pack — this is something you need to see for yourself.

Until next time,
Keith Kohl
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PS: If Team Biden wanted to do the "Right Thing" for the Middle East peace process, they would join Israel in a major air strike against Iran and blockade Iran's oil exports. If Iran is "neutralized" and unable to fund their proxies, stability could be achieved in the Middle East. I know the odds of Team Biden doing this are slim and none.

[ChuckGeb]

This makes a lot of sense. Strap in.

[aja57]

Distance from Tel Aviv to Kharg Island is 1600 miles. That's a chip shot for the IAF over Saudi Airspace. Won't happen until Rosh Hashonah has ended. Then the House of Saud will get their wish for $80/barrel.