Delusional Warhawks and Rising Oil Prices
The United States went to war with Iran on February 28th—93 days ago. As of mid-May, the Pentagon estimated the conflict's cost at a minimum of $29 billion. Independent estimates, such as those from Moody’s Analytics, place that figure closer to $100 billion. At least 13 U.S. service members have been killed and hundreds wounded. In Iran, independent human rights organizations have documented up to 6,000 deaths, including a tragic number of civilians.
The economic costs have been massive, yet militarily, nothing has been accomplished.
The war has inflicted a catastrophic infrastructure toll across the Middle East. The closure of the Strait of Hormuz has choked off 20% of the world's oil supply, triggering a 47% spike in U.S. gasoline prices and costing the average American household an extra $450 in just three months. With no peace plan in sight and oil inventories near historic lows, energy prices are poised to surge again.
The Warhawk Chorus
Retired Army General Jack Keane has long been a consistent warhawk. He pushed President George W. Bush to undertake the Iraq War troop surge in 2007 and served as a key advisor to Dick Cheney and General David Petraeus during its implementation. President Trump offered Keane the position of Secretary of Defense twice during his first term. Though Keane declined for personal reasons, he remains a key advisor to the Trump administration today.
This morning on FOX Business, Keane remarked, “It’s more likely than not that we will return to combat operations to finish these guys once and for all.”
Keane is far from alone. Lindsey Graham, Keith Kellogg, Mike Pompeo, and a chorus of American policy analysts and media outlets have beat this drum for months. Yet, they never offer a viable strategic plan for exactly how the job gets finished.
The reality is simple: if this war could be won decisively, it would have been months ago. Instead, Iran has proven it holds the upper hand. While Trump insists negotiations are progressing, Iran is dictating the terms. Every day, the U.S. message remains a broken record: “peace is almost here.”
The Iranians won’t—and don’t need to—concede anything. At this point, President Trump faces three unattractive options:
Restart combat operations.
Engage in a diplomatic settlement largely on Iranian terms.
Declare victory and walk away.
In my view, option three is the most viable. The President should declare victory, order U.S. combat troops home, and begin the multi-year effort of replenishing our military armaments and repairing fractured relations with our allies. The sooner, the better.
Market Manipulation vs. Physical Reality
In April, I told clients that the Strait of Hormuz could remain closed until the 4th of July. At this point, that timeline looks optimistic.
Roughly 10 million barrels of oil are failing to reach their destinations every day. Yet, oil prices moved sharply lower in May. This was largely due to relentless market "jawboning" by official and unofficial sources signaling that an Iranian deal is imminent.
Only it’s not. While the broader market prefers to bury its head in the sand, the biggest players in the energy sector have broken their silence.
Last Thursday, Chevron CEO Mike Wirth and ExxonMobil Senior Vice President Neil Chapman warned they expect oil prices to rise sharply in the coming months as crude inventories fall to dangerously low levels.
“The buffers and the shock absorbers are being steadily drawn down," Wirth noted. "The ability for the market to absorb this imbalance is drastically diminished today versus where we started. Over the next few weeks, we’re likely to see those pressures flow through more directly to physical prices... into June and certainly into July.”
Oil Prices Ready to Surge?
Exxon’s Neil Chapman suggested that crude could rocket to $150 or $160 per barrel in the coming weeks. “We’re approaching unheard-of inventory levels," Chapman warned. "You can debate whether that’s going to hit those really low levels in two weeks or three weeks. Once you get to that point, then you’ll see prices shoot up.”
These warnings echo growing anxiety among global oil executives. Last week, the head of the Abu Dhabi National Oil Company cautioned that full oil flows through the Strait of Hormuz are unlikely to return before next year, even if the conflict resolves tomorrow. “It will take at least four months to get back to 80% of pre-conflict flows, and full flows will not return before the first or even second quarter of 2027,” he stated.
According to Wirth, oil prices haven't spiked further because of high pre-war crude stocks, coordinated strategic reserve releases, and flows of sanctioned oil from Iran, Russia, and Venezuela. However, those buffers are officially running dry.
Wirth expects this energy crisis will force governments to focus on "insurance policies" by aggressively rebuilding reserves to insulate against future shocks like wars and pandemics. “How long they want to roll the dice before they refill inventories is a question policymakers will have to grapple with," Wirth concluded. "That’s going to put more demand into the market, which is going to put additional tension on the price.”
The Chevron boss further warned that repairing damaged oil and gas infrastructure in the Middle East will cost tens of billions of dollars—ensuring long-term upward pressure on energy prices well after the smoke clears.
THE ALPHA ROCK DIFFERENCE - Our investment strategies are a compelling alternative to traditional buy-and-hold investing. By focusing on liquid alternative investments and active risk-management, we target absolute returns, not benchmarks. To see how we’re invested and why, download our most recent Quarterly Investment Outlook, The End of Easy Money.
REVIEW YOUR INVESTMENTS - When market volatility increases, it’s a good time to review your investments, especially if you’re using a passive, buy-and-hold strategy. Please schedule a call or meeting)
We’d love to hear from you!
Your thoughts are important to me, so don’t hesitate to share them. They give me great motivation and encouragement.
IMPORTANT DISCLOSURE INFORMATION
This commentary reflects the personal opinions, viewpoints and analyses of the Alpha Rock Investments, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Alpha Rock Investments, LLC or performance returns of any Alpha Rock Investments, LLC client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Alpha Rock Investments, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
The S&P 500 Index or the Standard & Poor's 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The S&P 500 is a float-weighted index, meaning company market capitalizations are adjusted by the number of shares available for public trading. Note: Investors cannot invest directly in an index. These unmanaged indices do not reflect management fees and transaction costs that are associated with most investments.
Alpha Rock Investments, LLC provides links for your convenience to websites produced by other providers of industry related material. Accessing websites through links directs you away from our website. Alpha Rock Investments, LLC is not responsible for errors or omissions in the material on third party websites, and does not necessarily approve of or endorse the information provided. Users who gain access to third party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from use of those websites.
