Today we’re tackling oil, Iran, and what’s going on in the commodity space.
I’ll start by saying your guess is as good as mine as to what happens next, but as a financial planner, my job is to look at the trends and figure out what potential shifts could be coming for the economy and the markets.
The Oil Spike: Could This Be the Pin that Pops the Bubble?
Oil prices have seen a big jump, starting the year around $53 a barrel and now pushing close to $100. That’s a significant move in just three months, and the big question is: can this be sustained?
Historically, sustained high oil prices have been the “pin that popped the bubble”.
- 2000: Rising oil slowed economic growth and burst the tech bubble.
- 2008: Oil prices did the same for the crazy housing market.
When you look at today’s valuations, particularly in AI, the parallels to the 2000 tech bubble are very strong. If oil continues at this pace, it could have a big impact on the AI bubble and the economy in general.
While the US is producing quite a bit of oil internally—easily hitting 12 million barrels per day—we operate in a global market. A producer here will sell for a better price in Europe or China, so domestic production doesn’t insulate us from global price movements.
Market Correlations and the Dollar
When the price of crude goes up substantially, you typically see the stock market (S&P 500) struggle. More strongly correlated is the relationship between oil and the US dollar:
- When oil prices are rising, the strength of the US dollar typically goes up as well.
- A really strong dollar is usually not very good for the stock market.
The Impact on the Energy Infrastructure
The ongoing conflict in the Persian Gulf, particularly the closure of the Strait of Hormuz (which is being controlled by Iran), presents a serious threat. If this conflict extends, we could see lasting damage to the Gulf energy infrastructure.
Capital Economics projects that if the war lasts three months with lasting damage, oil could spike up to $150 a barrel—the same level we hit in 2008. Such a scenario could keep oil above $100 a barrel even through 2027.
Interestingly, the futures market is still pricing in a shorter event. The current crude oil contracts are around $98, but the market expects prices to fall to $90 by July. However, this expectation is starting to slow as the longer-dated contracts are creeping up in price.
The Next Commodity Move: Agriculture and Food Scarcity
The natural trend in commodities is for precious metals to move first, followed by industrial metals, then oil, and finally agriculture and livestock. The war is definitely going to accelerate this natural trend.
The problem is fertilizer: we (and the world) rely heavily on nitrogen fertilizer from the Persian Gulf producers like Qatar, the UAE, and Bahrain. The US alone brings in about $5 billion of fertilizer from that region. A disruption here will impact crop prices globally and create a strain on food scarcity in poorer areas of the world.
Gold and Silver: A Strong Case Remains
Precious metals have gotten pummeled over the past three weeks, mainly due to two reasons:
- Stronger Dollar: When the dollar strengthens (which it does when oil prices rise), the inflation hedge of gold and silver isn’t as important.
- Market Liquidations: A lot of folks have been selling to take significant profits after the substantial gains over the last year.
However, the underlying currents that lifted them up are only getting stronger. The long-term case for precious metals is still very strong:
- Inflationary Pressures: If oil stays elevated, inflation will spike back up, which is good for silver and gold.
- Recession Hedge: If the oil price impacts the economy and we enter a recession, central banks around the world will print money. This weakens currencies and is good for precious metals.
- Dollar Erosion: Central banks are continuously buying gold in massive amounts because faith in the US dollar is eroding as our national debt approaches $39 trillion.
The Investment Takeaway
For my clients, we had been slowly rebalancing out of gold and silver and “nibbling in” to energy stocks like Diamondback Energy. The market is still expecting this conflict to peter out, which is why even though crude oil is up 71% this year, energy stocks like Diamondback are only up 28%.
I still think energy is a great place to go, but I’d recommend continuing to dollar cost average into it. If the conflict extends and oil pushes towards $150, these energy stocks are going to make a ton of money. I also still like having precious metals in our portfolios, as the longer-term case for them is strong.
The biggest thing is how long this conflict is going to go. The longer it goes, the more problematic it will be for the economy. We are in late-cycle sectors like consumer staples and utilities, but if things start to get really ugly and stocks pull back below key moving averages, I will be looking to sell and go to cash and short-term bonds.
I hope everybody has a great weekend, and we’ll be following this closely on future Coffee With Kirks.
To watch Kirk’s full video:
Disclaimers:
The hypothetical scenarios presented are for illustrative purposes only and do not reflect the actual circumstances, objectives, or results of any specific client. They are not intended to predict or guarantee future outcomes, and should not be relied upon as individualized advice. Any hypothetical scenarios or illustrations involving current or potential future tax legislation are provided for informational and educational purposes only. These examples are not intended to be, and should not be construed as, legal interpretive guidance or authoritative analysis of any legislative statutes or regulatory provisions. Actual results may vary based on each client’s unique financial situation, investment objectives, and market conditions.
This content is intended for informational purposes only and does not constitute tax, financial, or legal advice. Investing carries risks, including potential loss of principal. Consult a qualified professional for personalized recommendations and to ensure compliance with applicable tax laws and regulations.