Since the Iran confrontation began oil has been sharply higher. In fact as of this writing, oil trades at $105, up big in the last week. However, we could be just beginning according to Vitol, the world’s largest energy trader. Vitol believes we could be hitting $150 oil in 2012 based on Iran cutting exports. Now one must ask, should we be in oil stocks?
Oil continues to rise week after week. Oil is up today, for instance, because of the Greek bailout. Oil traders believe that Iran’s oil export decline will leave a higher demand causing oil prices to rise. However, rising oil prices are bad for the global economy. For instance, “If crude oil surges, that’ll add more imported inflation to China and limit China’s ability to boost economic growth,” said Dai Ming, a fund manager at Shanghai Kingsun Investment Management & Consulting Co (Business Week).
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However, China is not the only one that will hurt from rising oil. Europe with its delicate economy could go into a double dip, especially if we hit $150 oil. The US’s growth could take a serious hit as well if oil continues to rise. Really if you think about everyone but oil traders, oil companies and oil exporters are hurt by rising prices.
Unfortunately, there is very little that can be done to stop this oil rally. Saudi Arabia has long said that it will increase production to cover any export cuts done by Iran. However, that so far has not stopped the price increase.
Iran’s large oil supply is putting a choke hold on the West because if the West attacks, we will see $150 oil I can promise you that. However, with this little “cold war” battle going on right now, the West and Iran continues to strike financially. Western nationals are not allowing Iran to conduct business in their countries which has put Iran on the verge of a recession. On the contrary, Iran is cutting oil export which raises prices and put the West’s delicate economic recovery at huge risk. It is a bad situation for all sides and if it isn’t resolved soon we could be in trouble, especially if the situation escalates.
This isn’t the first time Iran has given the US oil troubles. Back in the 1970s oil was expensive for the time and you could only fill up on allowed days (only Monday and Wednesday, for instance). We do not want to go back to that way of life because we could go into recession.
In conclusion, should you buy oil stocks? Who knows, if we continue on this path then yes. However, we will need to see how the talks with Iran go. If they go well and progress is being made I would hold off. If the talks go poorly I would be a buyer.