Summary:

Israel and Iran at War: Israel had intelligence that Iran had completed building multiple nuclear weapons (8 to 10) and that they were now mating the weapons with their middle and long range ballistic missiles. This alone was an existential threat to them but there was also intelligence that Iran was prepared to give some of the current weapons to their terrorist proxies to use directly against Israel, smuggling them (feared suitcase bombs) into the country and detonating them when ordered too. US Centcom General Kurilla noted US intelligence believed Iran was a week away from nuclear weapons threshold. Israel moved quickly to destroy military and some of the nuclear assets in Iran and killed leaders of military units and key nuclear scientists. A war premium of over US$10/b for WTI has developed over the six days of the war so far (from US$63.30/b to $73.68/b today). We had warned last week that this was a risk but were surprised how quickly this has developed. President Trump has demanded the unconditional surrender of Iran but their Supreme Leader said Iran ‘is not one to surrender” and warned the US of attacks to come against US forces if the US assists Israel. Israel needs US bombers that can carry the 30,000 pound deep bunker busting bombs. Israel’s planes can carry only a maximum of 5,000 pound bombs. To destroy the Fordo site of weapons development, bombs that can reach multi-levels below one-half mile are needed. Only the US has such bombers. More on this below.

Could crude oil rise over US$100/b or even US$130/b; or go back down to the low US$60’s? We go over these possibilities below.

OPEC surprised the markets with a rise of only 183,000 barrels per day of crude and not the 411,000 barrels per day that they had been forecasting. What is occurring and will OPEC be able to increase volumes by 411,000 b/d in June and July as forecasted? More on this below.

Energy stocks have had a good run on the geopolitical events in Iran and Israel but are getting short term overvalued. Traders may want to take profits while investors should hold cash reserves for the next low risk BUY window. More on this below.

Stocks in general have 15-20% downside with the tech area being the most vulnerable. Another great buy window as we saw in early April should be seen during July. Get ready to add to favourite energy ideas when we send out the next BUY signal.

This week’s Eye On Energy Details:

Current Challenges:

Challenges for President Trump and his administration over his second 100 days will be tough: He needs success on these issues before the end of this timeline:

• Get the Senate to pass an extension of the debt ceiling and raise it by US$4T to US$41T.

• Be able to fund the current deficit and renew maturing Treasury issues when foreign investors worry about US trade policy and support of NATO. China and Japan have been selling some of their substantial Treasury issues.

• Get his tax cuts permanently approved. The Senate now has the “Big Beautiful Bill” and they may not acquiesce to the House version and get a final bill to President Trump before July 4th (Independence Day). This may be a market problem (smackdown potential) if delayed or a deal is not done between the Senate and the House.

• Show that he can cut wasteful government spending. The current deficit looks to be US$2.2T for this fiscal year and could go higher in coming years if the growth forecast assumed by the bill does not occur. The current deal looks to add US$30T to the deficit over the next 10 years. The Moody’s rating downgrade from ‘Triple A’ was a blow but so far has not raised interest rates to get required funds. Markets are watching to see how upcoming Treasury offerings do.

• Get Congressional approval to close down government departments, regulations and staffing. So far President Trump’s moves have been halted by Judge rulings. Congress passing such legislation would allow for contraction of the Federal force and departments.

• President Trump’s volatile moves on tariffs have had a strong impact on stock markets. The latest on-off of 50% for the EU is just one such market mover. The delay to July 9th means that 27 EU countries need to agree to harsh trade changes. For Germany that means for autos and for France food and wine. We are skeptical that this can be done. So far no tariff deal has been made and signed. The one that has initial agreement is with the UK but no papering of the deal has occurred yet. His threat against Apple of 25% tariffs on imported cell phones to force them to move manufacturing to the US awaits Apple’s response. Other cell phone manufacturers may face the same increase in tariff rates.

• US Retail sales fell 0.9% in May as consumer spending pulled back as they feared higher tariff prices.

• Get peace negotiations started between Russia and Ukraine and a ceasefire implemented to end the weekly death toll exceeding 5,000 personnel from both sides (military and civilian).

• Finish off Iran’s nuclear weapons program and get an end to the war between Israel and Iran and its proxies.

• The US has closed its Israeli embassy and China has warned its citizens to leave Iran.

I remain concerned that the current Israel/Iran war and/or other Geopolitical Challenges could take place and be the ‘Black Swan’ to take the general stock markets to our downside targets.

Our expected downside targets are:

• Dow Jones Industrials Index 35,000 (now 42,469)

• S&P 500 4,800 now (now 6,012)

• NASDAQ 13,000 (now 19,632)

• S&P/TSX Energy Index <225 (now 281)

• WTI US$56-58/b (now US$73.68/b)

We see WTI having the potential to rise over US$90/b and even a case for over US$130/b for a short time. The potential issues that could drive prices upward are:

• If there was a material release of radioactive materials as Israel (or with US help) destroys Iran’s nuclear sites.

• If Iran attacked shipping (crude oil carriers) leaving the Gulf Of Hormuz. Over 18 Mb/d travel this route. Other choke points they could attack are the Bab el-Mandeb and the Suez Canal.

• If Iran mined the entrance to the Straits stopping all shipping.

• If there were mass civilian casualties in either country demanding further responses.

• If Iran attacked US warships or US military personnel in the Middle East area.

• If Israel attacked Kharg Island which is the shipping port for most (90%) of Iran’s 1.8 Mb/d of exports (mainly to China). Israel has already attacked facilities at Iran’s largest natural gas field near Bander Abbas.

• Israel has launched initial cyber attacks against Iranian banks but if this spreads across their civilian economy (utilities, all financial institutions, government computers, etc.). They today knocked out one of the Iranian crypto exchanges – US$60M+ coins all gone! Most bank ATM’s are shut down.

• Iran’s newest ballistic missiles continue to breach Israeli airspace and knock out military assets. They have already successfully attacked the Israel Defense Forces (IDF) headquarters.

To see WTI crude prices back in the low US$60’s or lower would require an end to the Israel/Iran war and all of the nuclear facilities in Iran destroyed and the country signs a surrender that includes ending support for global terrorism. Regime change is unlikely during this phase. That would be up to the Iranian people after the deal is done.

The Trump tariffs have still not been seen by customers as inventories of current stock need to be sold and then new imported items will carry the tariffs and become relatively expensive. This is now expected to hit stores during July. Both Walmart and Target have warned of the cost of new inventory. Some economists see tariff prices impacting households by US$2,800 by year end.

Into the year end we see much higher crude prices. If we are right that by year end Iran will lose production of >1.5 Mb/d and Venezuela > 500 Kb/d then there will be a significant shortage of crude production and prices will lift over US$75/b. Remember global inventories are low historically so even a 1 Mb/d shortfall can drive prices up materially.

For long term investors, find the ideas you want to own for this energy (and most commodities) super cycle and put your BUY orders below the market on plunging days to get great bargains for significant appreciation into the end of this decade.

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