Jim Cramer’s advice for investors during U.S.-Iran war, oil surge
So you’re telling me that our continent is energy self-sufficient and yet last week oil was screaming faster than we’ve ever seen it before? Or does all this new Permian Basin oil mean nothing? Or do you think cars now consume much less fuel than during previous oil shocks? In the short term, the answer is unfortunately yes. This doesn’t matter since our country is based on free enterprise. We are not a command economy. The president of the United States, or even this president, cannot decide that Canada should send all of its exports here. It cannot prevent the around 10 million barrels of crude and refined products we send abroad every day. If that were the case, we would theoretically be unaffected by supply shocks elsewhere. “Theoretically,” this stems from the possibility of one day having enough refining capacity to supply the type of oil we pull out of the ground and ship internationally. Our refineries still need imported crude oil. We do not have a closed-circuit oil market in this country. It is open loop. The US oil standard, known as West Texas Intermediate crude, is trading at a discount to the global benchmark Brent crude. But our companies can sell at a higher world price if they want, so the two are intertwined. Unless the president bans all exports, we won’t be able to unbundle our prices and we’ll build refineries overnight to supply the light sweet crude found in places like the productive Permian. So forget energy independence when it comes to the price of oil. What you see is what you get at the price published every day. The rally fueled by the US-Iran war is not a “fake” based on a giant short squeeze, although there have been numerous squeezes. But there is good news. Over time, the world can afford to close the Strait of Hormuz, a vital waterway for global crude oil supplies from the Persian Gulf. The world has the spare capacity and equipment to increase production quite quickly. But the producers can’t make a change and it’s only been a week long war. Therefore, if the conflict in the Middle East continues, there will be talk of oil being at $150 or even $200 per barrel per day in the next few weeks. Steel yourself; Pessimists will have gravitas. Some of the talk between $150 and $200 will be of the usual horror variety. I can see the parade of bears on display, with their sullen faces and flashes of expertise, as a real firestorm of negativity. The usual gang of never-exposed charlatan “experts” with a few good years and nothing else will shout negativity from the rooftops until their throats explode. Good for marking work I guess. Why will their voices echo? Why are they not easily refuted? Because of 2022, that’s why. Consider what happened in late February and March 2022, when Russia invaded Ukraine. When Russia turned to Ukraine, traders assumed that an oil embargo on Russia would eliminate approximately 7 million barrels of oil per day (including both petroleum and other oil products) from the world supply. This caused Brent crude oil to rise from around $95 per barrel to $139 in a matter of weeks. It took about six months for oil to return to pre-war prices as Russian oil flooded the market and production increased worldwide. Now that the Strait of Hormuz is effectively closed, it will eliminate twice the amount of oil that traders feared we would lose in the Russian embargo. This is true. Last year, an average of over 14 million barrels of oil passed through the Bosphorus per day. It is no longer possible to put it on the market. He was stranded. He just left. Now. So, if oil can rise from $90 to $139 in a few weeks with a loss of 7 million barrels in 2022, it is reasonable to believe that it can rise much more with a loss of twice that amount. Therefore, a price of $150 or $200 per barrel should be considered possible. Or at least you’ll hear and read about that range from commentators starting next week, and it will be within the realm. No one will ridicule these predictions. They can’t be shot because of what happened in 2022. Will it stay there now? Nobody knows. It’s as if something as predictable as closing the Bosphorus wasn’t considered by President Donald Trump before the war began. It’s not as if it has completely refilled the Strategic Petroleum Reserve. It’s just over half full, as it was vacated by President Joe Biden to help stop the price surge in 2022. This gamble actually paid off back then. It helped slow and ultimately blunt the increase. This president downplayed the need to touch the SPR this time. However, when it comes to oil, what goes up must come down. This is because oil caused rapid demand destruction from $150, followed by slow supply increases, and ultimately back to where we started. The operative term is “eventually.” We cannot determine when this will happen. This means, at least to me, that without a plan, just using the 2022 scenario, we will be stuck with much higher prices, perhaps for the next six months (the time it takes for the market to calm down after Russia’s invasion of Ukraine) unless the Strait quickly opens. When you think about it, the 2022 paradigm was pretty nightmarish. The S&P 500 fell nearly 25% from its closing peak in January 2022 to its closing trough in October, driven by both the rally in oil and the Fed’s rapid hike in interest rates to quell rising inflation. The consumer price index rose as high as 9.1% in June 2022; President Trump said this was the worst inflation in U.S. history, though it was the highest since 1981. Counterfactual. We no longer have Covid supply constraints or a Fed about to raise interest rates at a historic pace; which included four consecutive super-sized 75 basis point increases in 2022. However, if oil remains between 150 and 200 dollars, even for a short time, it could drag most of the world into a serious economic slowdown. Two-thirds of the US economy is services and one-third is industry. Still, people living in either of these two spheres will see prices rise. Oddly, such an oil boom, although it would lead to inflation, would reduce economic activity in this country and give Trump’s Fed chair nominee Kevin Warsh the authority to cut rates when he (presumably) replaces Chairman Jerome Powell, whose term ends in May. Don’t think so badly about stocks because of oil. Our market responds more to interest rate cuts than to other incentives. However, I want you to be realistic. While the world was producing 105 million barrels per day, our barrel price was 60 dollars. If you disable 14 million barrels of oil per day after the closure of the strait, it is certain that oil will rise far beyond the $100 level we are currently facing. Take it as a given. So does that mean we should be worried about a big hike at least through 2022, maybe without a hard-line Fed? This is possible because it is not clear whether the White House can quickly resolve the Strait issue. The United States is working to limit Iran’s “ability to attack with missiles and drones, and that rate of attrition will increase in the coming days,” Energy Secretary Chris Wright said on Fox News on Sunday. He continued, “So we’ll be careful, we’ll be careful, but soon the energy will flow.” We also hear about insurance, but there is no one who takes it. We hear that it is used by the US Navy to escort tankers across the Bosphorus. However, “opening” does not necessarily mean that it will be used. Very worrying. Unless the Navy is going to pilot oil tankers themselves, we have to assume we’re going for $150 to $200, at least in terms of chatter, if not reality. But like so many troubles our markets have faced over time, if you sell on Monday based on this downside scenario I just traced, history says you’ll regret it. Go back to 2022 again. It would be terrific to avoid a decline in the S&P 500. You would have to sell on the first day of the Russian attack in February and then go to the bottom again – as if it were easy to know when at that moment. While there’s no official bottom for 2022, June of that year turned out to be a good time to enter as it was pretty close to the year’s lows. But how could you know? There was no real sign that anything would go right. Oil was still high. The Fed was still tightening. This would require a level of clairvoyance far beyond the comprehension of even the best traders with the best machines. Even with the Fed’s dramatic moves ahead of you, it’s much better to just ride it out. I think the same thing is true now. Because the loss of these 14 million barrels should be considered temporary no matter what. Oil will find its way into the market at significantly higher prices, both from the Middle East and around the world. Even if there is a good reason to expect a decline, it is a bad reason to sell stocks because you will not be able to predict when the decline will end and the rally will continue. And if the pressure on stocks during the war is really just about the price of oil, then the rise should eventually continue. So what do you do? I think the most important thing you can do is lose your fear of the $150 to $200 circles. They will do their best to scare you. Think of it as their job. As I made clear in “How to Make Money in Any Market,” your job is to stay in. You can raise some money if you want, just like we did for the Club, but now that the market is fundamentally oversold according to my trusty S&P Short Range Oscillator, we’re more interested in buying rather than selling. We’ve summarized our trading week on Saturday in one piece for members. What you shouldn’t do is panic. My estimate of an extraction of 14 million barrels due to the closure of the strait represents the maximum that can be extracted. It cannot be ignored that we do not see several million barrels being filled immediately by other countries. So, when the oil market calms down, the rip will sell and oil will bounce back. If you exit the stock market, I can promise you that the rise from low interest rates and falling oil will be left behind. I know this is a big bump to consider, especially as we deal with fears arising from crisis concerns in the multi-trillion private credit market; I recently came across this in an opinion piece published on Sunday. But you must do this. No, seeing oil going to $150 or $200 is not a bullish sign. However, the reaction to these market prices is upward; so bullish that, with rates falling, even leaving ahead of time risks missing the opening of the Bosphorus or the opening of worldwide taps. So once again, strengthen yourself. As has happened many times since 1981, be prepared for a sell-off that you cannot avoid without missing the subsequent rally. (See here for a complete list of stocks in Jim Cramer’s Charitable Trust.) When you subscribe to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trading alert before buying or selling a stock in his charitable foundation’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after issuing the trading alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH THE DISCLAIMERS. NO CIVIL OBLIGATIONS OR DUTIES EXIST OR SHALL BE RESULTING FROM YOUR RECEIVING ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULT OR PROFIT CAN BE GUARANTEED.
