Escalating and threatening words over the weekend between President Trump and Iran's President Rouhani will likely keep WTI crude oil prices above $60 per barrel until year end when Iran sanctions kick in, a bullish environment for U.S. shale producers. Major threatening catalysts for the oil markets are not only a potential drop in Iranian crude oil exports, cutting available supply, but also a potential move from Iran to block Persian Gulf exports (as in: "if I don't sell it, no one sells it").
Trump's 'Playing with the Lion's Tail'
Hassan Rouhani issued a strong warning to Trump on the US campaign to bring Iran exports down to zero. Iran has threatened the supply of crude oil coming from the Middle East by shutting down transportation passing through the Strait of Hormuz.
The strait is a narrow passage connecting the Persian Gulf and the Gulf of Oman, which is the only passage for Persian Gulf crude oil from key producing countries, including Iran, United Arab Emirates and Saudi Arabia. More than 30% of seaborne crude crosses through the straight, a major choke point to crude oil supply.
In this increased volatility scenario, we are bullish Frontline Ltd (FRO) , one of the world's largest crude oil tankers, as the company will benefit from longer hauls of crude from non-Persian Gulf producers to the main markets in Asia, Europe and the Americas.
Trump's Zero Export Campaign Will Keep Putting Pressure on Crude Oil Prices
The Trump Administration continues to push allied countries to cut their oil purchases from Iran down to zero by Nov 4. Iran's sanctions are likely to continue without a viable compromise from either Iran or the U.S. in the future.
Iran represents OPEC's third biggest oil producer with over 2 million barrels a day of exports. Given that the Trump Administration is putting pressure not only on Europe, but to large consumer countries like Japan and India, it is likely that Iran's drop in exports will be significant, perhaps close to 500,000 barrels a day.
In this environment, we are bullish the United States Oil ETF (USO) , the closest proxy to the West Texas Intermediate (WTI) crude oil prices. Conversely, investors could have a long-term exposure to crude oil via the USO January 21 $16 Calls, which expiration goes beyond the November deadline for Iranian's export cuts allowing for additional time exposure.
In addition, crude oil above $60 is a healthy level for many of the US shale producers which will are economically incentivized to produce above their break-even prices. We prefer to own the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) , as a proxy to the sector. The XOP's top holdings include Permian-focused producers Matador Resources (MTDR) , Energen (EGN) and Parsley Energy (PE) .