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How Will Oil React to Iran's Promised "Punch"?


It's hard to imagine it will take it calmly.


Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).

Last week I reported a rumor that Iranian Basijj militia chiefs are planning to seize the British embassy in Tehran (see Prepare to Dodge Risks From Greece, Iran).

Yesterday, the following appeared:

Supreme leader Ayatollah Ali Khamenei said on Monday that Iran is set to deliver a "punch" that will stun world powers during this week's 31st anniversary of the Islamic revolution. "The Iranian nation, with its unity and God's grace, will punch the arrogance (Western powers) on the 22nd of Bahman (February 11) in a way that will leave them stunned," Khamenei, who is also Iran's commander-in-chief, told a gathering of air force personnel.

What could this "punch" be? Last week Iran said it planned to raise its uranium enrichment to 20%, right on the border of weapons grade Uranium 235. That's already on the table. Embassies look like the punch.

Today, is reporting coordinated attacks on the French, Italian, and Dutch embassies by Basijj militia dressed on civilian clothes. So far it's only rocks and bottles. I wouldn't be surprised if it culminates in them taking over the British embassy, splitting up the hostages, and making them human shields at nuke sites.

This certainly has history has behind it, and it probably doesn't generate an immediate response. (See Jimmy Carter, 1979). Nevertheless, I can't believe oil will take this calmly. As of this morning, I have no position in oil, but by the close today, I expect to have significant exposure to oil. My favorite plays are United States Oil (USO) and Continental Resources (CLR), a domestic E&P company.

It seems nuts to try to predict this, but the rhetoric seems so strong that something must be planned. Worst case for hedging, nothing significant happens. Unwinding shouldn't be very expensive. Worst case for the world is really bad. The risk/reward ratio leans strongly to a protective position. I'll update if I see anything to change the outlook.

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No positions in stocks mentioned.

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