How to Profit from the New Iranian Sanction
Growing up in Massachusetts, my mother used to say, “Live long enough, and you’ll see just about anything happen in politics.”
And she was right.
A wrestler, a standup comic, several movie actors, and former sports figures have been elected to office; tea parties are back as a way of challenging leadership; even a disgraced former governor makes it onto “Celebrity Apprentice.”
But she never saw this one coming – a U.S. sanctions move against Iran that may actually work… and make you some money in the process.
You see, today I’m going to make two rare suggestions. First, that one recent geopolitical decision will present a real investment opportunity, and second, that you should short a specific security to capitalize on it.
And here’s why…
A Profitable Short-Term Exception
I have generally avoided talking about how geopolitical discussions influence oil.
Politics is the all-too-available scapegoat to explain jumps in prices or translate what occurs in the oil market into an overly simplistic (and usually incorrect) view of how the theory of the week will change the world as we know it.
Certainly, what happens in international politics, if it is significant enough, can have an impact on what happens in the global oil market. Usually, however, it is merely a talking point for a droll media mouthpiece or somebody looking to get elected.
A crisis somewhere can increase jitters among traders and ratchet up the price of oil futures. As soon as the “crisis” dies down, however, so does the effect. Other factors, such as genuine demand, the strength of the dollar, or what is actually being extracted at fields worldwide, should have a greater weight in determining NYMEX pricing in New York or Brent pricing in London.
With all the rhetoric and spin expended, international politics rarely has the result that TV’s bobbing heads say it will. Short of quite rare events, like a war, some populist demagogue nationalizing my oil investment, or a politico waking up one morning and fundamentally changing the rules, I have rarely found exceptions to the actual muted impact of geopolitics on prices.
Welcome to one of those exceptions… and a chance to make some relatively fast money.
Geopolitics is about to become profitable for the little guy.
Finally, Sanctions That Matter
In its continuing attempts to prevent Iran from obtaining nuclear weapons, Washington has found a sanction that will work.
I know this will create identity problems for those who avoid everything governmental, but for this one, you need to bite the bullet and applaud the crowd inside the Beltway.
Here’s what’s happening.
Both houses of Congress have passed a law sanctioning everybody involved in selling gasoline to Iran – trading companies, banks, shippers, insurers, facilitators.
President Obama will sign it. The European Union will go along. Even Russia and China may give some support. China is selling some gasoline to Iran currently, but such political face-saving will end soon enough. The Chinese domestic market has exploding demand of its own and will soon require Beijing to attend to what is happening at home rather than playing “gasoline politics” abroad.
The new sanctions finally hit where it really hurts.
Teheran has a deteriorating refinery infrastructure, a heavily government-subsidized fuel market (domestically produced gasoline costs drivers about 39 cents a gallon), and insatiable demand. The government tried to end the subsidies recently, but the popular rejection quickly shot down that trial balloon.
President Mahmoud Ahmadinejad and his cronies are stuck. The country needs to import almost half of all the gasoline sold domestically, along with increasing amounts of diesel and heating oil, and this is beginning to put a significant strain on the economy.
And that’s before the new U.S. sanctions arrive…
Already, some two dozen major traders and oil companies have announced that they will not sell to Iran. That pushes Tehran into more expensive and shadowy secondary markets. Iran cannot obtain credit lines or insurance for shipments. That makes the risk premium even higher for those providing the gasoline… to say nothing of the likely American reprisals it will face.
A Rare Opportunity for Gains
Okay. So it looks like the D.C. crew got this one right. But how could it make you money?
Ah, here’s the interesting part.
Moors Rule No. 31 states that “changing available supply while demand remains constant always results in investment opportunities.”
This is true whether the supply is expanded or cut. It is hardly the intent of the sanctions policy, but it becomes a side benefit nonetheless (at least to the individual investor).
Iran has been a profitable income generator for producers and traders in oil products. Given Iran’s need to import, and with major Western sources off-limits, they have been able to sell at a marked-up price. That will end, however, as fewer traders want to chance locking horns with Uncle Sam.
The result will put greater volumes of oil products – gasoline, diesel and heating oil – back into the global market.
Once the sanctions kick in, and as Capitol Hill soon works out a final compromise version of the American legislation, those trading gasoline and oil products will look elsewhere to sell the volume. They need to keep off-take contracts current with refineries, since to let them lapse is the same as losing the source. They will take and sell product, but at market price, not the inflated prices paid by Tehran.
Iran is now the leading “distressed” end-user globally, and that guarantees the highest selling price. Expect the netback paid by the trader to refiner also to decline.
This does not take place simply because a public statement is made.
For example, Royal Dutch Shell (NYSE:RDS-A), Indian refining major Reliance Infrastructure Ltd. (OTC:RELFF), and Swiss private powerhouses Vitol, Glencore, and Trafigura have all announced suspension of Iranian trade.
But deliveries already contracted will continue through April. In addition, given that the three largest private houses – Vitol, Glencore, and Gunvor – had provided about half of all the gasoline going to Iran, directly or through third parties, they are not playable by investors.
The effect on the market, however, is.
Now it is at this point you need to be careful. Timing is crucial.
This profit opportunity will come and go quickly. There will be a brief period of one to two contract cycles (about 45 to 75 days), in which the oil product trading market will be oversold. Trading companies will have excessive product on their books from the transitioning out of Iranian trade.
It is at this point that you should short my favorite oil ETF, the PowerShares DB Energy Fund (NYSE:DBE).
Based on the Deutsche Bank Liquid Commodity Index-Optimum Yield Energy Excess Return, DBE is the only liquid ETF allowing investors to participate in futures contracts movements in West Texas Intermediate Light Crude (the basis for NYMEX contracts), dated Brent (performing the same function for London and European pricing), heating oil, natural gas, and RBOB gasoline (“reformulated gasoline blend stock for oxygen blending,” the new NYMEX benchmark gasoline contract).
In short, DBE is a security well structured for the move. It is the only one available that will pick up the blip as it rapidly moves by.
The only two matters you need to know are when to start the process and when to end it. This will be a quick move in and out of a market that will experience a temporary imbalance.
When the time is right, I will tell you when to open and when to close the position… right here.
Next up, I’m off to Frankfurt, Germany for meetings on major changes in oil finance. Will talk to you from there next time.