Oil prices are not going down until three conditions are met and verified. One, no nuclear weapons, verified by a government that can be trusted on the verification. Two, a free flow of oil through the straits without threat. Three, control of Iranian oil exports. We are nowhere near any of the three. That is the checklist I am working from, and it is why I am not treating the current oil price as a spike that resolves itself.
The third condition gets the least attention and matters the most, because it is really a question about cash. Iran sells 95% of its oil to China. An awful lot of cash changes hands in return, and it is not in dollars. Where does that cash go? Into a bank, and the bank is not in Tehran. It is more likely in Dubai, maybe Cyprus, maybe somewhere else. Until you control the cash, you do not control the oil. Until you control the oil, you have no leverage over the party selling it.
The reason this matters for portfolios is straightforward. A persistently high price of oil is what is forcing a resolution of this crisis, and the longer it persists, the higher the likelihood that the global economy goes into recession. That cost is carried broadly, not just by the parties involved. So I am watching those three conditions rather than the headlines. When they begin to be met and verified, the oil price will tell us before anyone announces anything.
