Subject: A contrary take on the oil crisis / iran
1. Oil is in strong backwardation.

https://www.cmegroup.com/marke...

26MAY 100.83

26JUN 97.17

26JUL 93.69

26SEP 87.57

26DEC 81.36

27MAR 75.81

The organisations with the most money at stake in oil, seem to believe oil will be much cheaper in the near future than today.


2. Oil is a much smaller factor now for inflation than it was in the past e.g. in the 1970s / 1980s.

Partly that's increased efficiency (lights, cars, computers etc), partly alternatives such as renewables.

But basically a $10 rise in the price of oil adds up to only 0.1% on CPI (short term direct use) and 0.1% (long term indirect use) if it persists.

It varies by country, the US is quite energy intensive (8% of CPI basket). The UK less so (6%). Petrol (gasoline) is about 2% of the UK CPI basket.

These aren't really scary numbers as long as we don't get an extreme tail risk situation of e.g. 10 year war that collapses all oil production in the region.


3. I cannot see why the US Republicans would entertain an oil crisis continuing during the US midterm elections when they are already facing problems.

Nor can I see why any of the wealthy middle eastern states would want this to continue.

Even for Iran, oil spills affect their water supply potentially (you can't desalinate oil). No oil being sold affects their economy. Ultimately, you need food and water and money.


4. My own investments are in UK REITs. The UK 10Y gilt has adjusted from 4.3% (and falling) to 4.8% in the last week or two.

I suppose that suggests +5% extra total inflation over a 10 year period, (or rather, slightly more, given that high oil prices shred the 'growth' part of bond yields).

This has caused UK REITs to re-price by about -15%, ish. i.e. If you have assets yielding 5-6% and they reprice up by 0.5% to 5.5-6.5%, then you lose about 10%. Add the impact of gearing, etc.

However, in the long term many REITs benefit from inflation feeding through in contracts that are linked to inflation.

So it's short term pain for long-term gain I suppose, in this sector.


5. I acknowledge there is a tail risk that both sides can't or won't back down for some reason and it just gets worse.

That will shred pretty much every stock.

But then again. Midterms. And Trump is famous for 'chickening out'.


6. The intensity of Iran's response has greatly diminished.


7. The media love hype and narrative and don't enjoy 'ehh maybe it will be fine' type stories. The long tail risk outcomes are where the entire media focus is.

But as investors we should take precaution against tail risk but focus on the most probable outcomes.

It is important not to let the news sway you. Putting a journalist effectively in charge of your financial decisions doesn't strike me as a great plan.


8. Trump notoriously tends to repeat the last thing he heard. He kept talking about 4-5 weeks at the start. Lately, 'not finishing this week'.

Coincidentally 4-5 weeks is about when minesweepers, escort convoys and allied fleets are expected to be in place to try to resolve this.

I believe, on balance, we are probably about 2-3 weeks from the end of this.

I think it's not a storm in a teacup but neither is it the end of the world.


That's my take, anyway.

TRS