Revolution in the desert

Word: Brabant.

Meaning: To push someone to see how long you can tease them until they snap.

Example: See recent Iranian use of drones over the oilfields of Saudi Arabia.

A strange way to begin a letter about your money, I suppose. And for the record, the word ‘brabant’ does not actually exist. It was coined – if you can call it that – by author Douglas Adams and TV producer John Lloyd in a 1984 book called The Deeper Meaning of Liff: A Dictionary of Things There Aren’t Any Words for Yet – But There Ought to Be.

It’s a nice term. I think the concept would neatly describe 90% of my time at school. Or 95% of my childhood interactions with my younger brothers.

The feeling of pushing someone – searching for that nerve that’ll get a reaction – is something we can all identify with. And I think it perfectly encapsulates Iran’s recent actions towards Saudi Arabia.

Which brings me to another concept that there isn’t a word for, but should be: the feeling that you are living through events that will populate history books in fifty or a hundred years’ time. (If you know of, or can think of, such a word please write to me at nick@southbankresearch.com.)

I think about stuff like this a lot. I think it’s partially because I have a young son. I wonder: when he’s grown up enough to learn a little history, what events will he ask me about?

Because that’s an acid test of an event’s significance, right? To leave a mark. I know as a child I asked my parents about the moon landings, JFK’s assassination and the fall of the Berlin Wall.

What will my kids ask me about? At a guess, I’d say 9/11, the global financial crisis in 2008 and likely (and rather depressingly) Brexit.

But that feeling you get when something big happens – something you know will burn bright enough to cast a shadow long into the future. That’s what interests me. I don’t think there’s a word or phrase for it. But whatever you call it, I can’t help but feel it right now over what we saw above the Saudi oilfields at the weekend.

The short version of what happened: at the weekend a drone strike hit Saudi Arabia’s Abqaiq oil processing facility. As Southbank Investment Research’s resident energy expert James Allen put it, the Abqaiq facility is “perhaps the single most important piece of oil infrastructure on the planet.”

The US has blamed Iran. (I’m going to take the US at its word in this piece, rather than get stuck in a hall of mirrors involving conspiracy theories, which may form the basis of a future piece instead.)

The numbers tell the rest of the story. Again, I’ll quote James’ piece to his Power and Profits subscribers yesterday.

The estimated 5.7 million barrels a day of lost Saudi oil is the single biggest sudden disruption ever, surpassing the loss of Kuwaiti and Iraqi supply in August 1990 and Iranian output in 1979 during the Islamic Revolution, according to data from the International Energy Agency.

Brent oil, the global benchmark, jumped more than 19% when markets opened on Monday. In dollar terms, the nearly $12 a barrel surge was the biggest intraday rise since trading began in 1988.

A 19% jump in the price of oil tells you everything you need to know: this strike mattered. It doesn’t just ratchet up the tension in the Middle East, as previous tanker related shenanigans did. It is the biggest disruption to the oil supply in decades.

It’s a story that brings together multiple trends we’ve seen developing over the last decade or so. Let’s work it through:

On a purely financial level, the world stands on the brink of recession and rising energy costs could be the catalyst.

In terms of Middle Eastern politics, we’re seeing two Islamic superpowers edge towards confrontation. Given Iran and Saudi Arabia represent different branches of their faith, there’s a sectarian element to what’s happening, too.

In a wider geopolitical sense, we’re witnessing the natural consequence of Donald Trump’s alliance with Israel and Saudi Arabia, and associated aggression towards Iran. What comes next in that story? I don’t know, but it’s hard to claim it’ll be nothing. Something is coming. What? I’ll ask James Allen that one.

Oh, and on a pure technology level – which of course is our primary focus in this letter – the attack was carried out by drone, something which wouldn’t have been possible ten years ago.

As James pointed out earlier in the week, a big part of this is the fact that the sanctions against Iran have effectively given it nothing to lose. If Iran can’t export oil or use the financial system for a prolonged period of time, it is hard to see it surviving without some sort of internal turmoil.

That frees its hand, in a way. We saw that at the weekend. But that freedom only extends so far. If it results in a Saudi/Israeli/US attack on Iran… it may well prove to have been the wrong move.

I don’t think Iran wants war. I think it wants to show the Saudis – and by extension, via the oil market, the rest of the world – that it can inflict damage as well as take it.

That’s the question Iran is asking: can the world stomach not just a war but an oil war that sends prices skyrocketing? Given that might cause a global recession and cause a domino effect across the world economy… it’s a valid strategy.

If the Saudis/US/Israel are serious about pushing Iran further, you can expect to see a new narrative being spun soon: the idea that Iran could be taken down quickly. A kind of forward guidance for the oil markets: there may be fighting, but it’ll be over quick.

Perhaps that’ll happen. Or perhaps not. If you pushed me, I’d say it’ll happen, if only because it’ll be hard for Trump to back down. And if he could pin an energy price spike – and recession – on an external enemy, that’d likely help his re-election chances. And of course, “you don’t change leaders in wartime”.

In the meantime, the stocks James identified as potentially benefitting from the tensions in the Middle East continue to tick higher. More gains are on the cards as the situation deteriorates into potential all-out war. But know this: James has identified a further act of geopolitical aggression set to hit British shores. This act won’t hit oil, but a secondary source of energy that’s actually far more important to our way of life. It could also lead to a huge move into one UK-listed stock, in particular. Find out more here.

More tomorrow…


Nick O’Connor
Publisher, Exponential Investor

Category: Energy

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