Nothing drives oil prices up faster than an old fashioned Middle Eastern War. This is especially the case when the intended target of the war is one of the largest oil producers and exporters in the world— Iran. This past week the situation concerning the Iran Nuclear Accord inched closer to becoming the spark that triggers renewed crippling sanctions against Iran’s oil exports or even a regional war.
President Emmanuel Macron of France will be immortalized for stating the not so obvious first. If President Trump withdraws from the Iranian nuclear deal, “that would mean opening Pandora’s box, it could mean war.” Almost as an afterthought he added hopefully, “I don’t believe that Donald Trump wants war.”
The only person who can truly say what Trump wants in regards to Iran is Trump himself, not his self-styled best friend from Europe, Macron. Yet Trump has all but said that he will not sign off on the sanctions waivers on the Iranian Central Bank and their oil exports industry on May 12th. He has famously said (repeatedly) that the Iranian deal is a terrible one for the U.S. and the entire world.
According to two anonymous senior White House officials as of May 2nd, the President already has decided to tear up the deal with Iran. The only issue they are wrestling with is how to best do this. The other five signatories to the treaty Britain, France, Germany, Russia, and China are all for keeping it.
Despite Macron’s best begging and pleading act over a three day official state visit at the end of April in Washington, it looks increasingly like Trump will keep his own counsel on this issue, which is that this is the worst deal the U.S. ever signed, period.
What this means for oil prices and markets is that even if Mr. Macron is wrong about the decision leading to war in the Middle East, it will certainly lead to another oil embargo on Iran. This means an imminent reduction of over three and a half a million barrels per day to tightly supplied energy markets. You an see from this chart below the crucial amount of oil that Iran has been supplying since the 2015 accord allowed for their oil exports to flow overseas again:
The President not renewing the waiver on May 12th will mean that a 180 day clock starts counting down. During this time, all companies and countries buying oil from Iran will be required to start scaling back their purchases to zero by the end of the deadline. This would mean a six month period of gradually rising oil prices.
The President could also declare all sanctions immediately back on the table. Instead of a gradual significantly higher march in oil prices, we would get a more dramatic oil price shock. Financial markets would suffer along with the snap higher in oil prices.
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Either way, massively higher oil prices look likely that they will be in the cards either over the short or the medium term. The good news is that you do not have to lose any sleep at night wondering how to protect your portfolio from substantially higher oil prices. Gold justifiably deserves its hard-won admired place in recorded human history for safeguarding investors around the globe from oil and commodities prices shocks and financial crises both. The yellow metal has a longstanding tendency to move higher with oil prices.
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