My friend Art Cashin included this note as part of his morning missive on Thursday:
In the latest edition of his invaluable Geostrat service, the insightful Bob Hardy paints a rather stark picture on the fall of Ramadi. Here's a bit:
Iraq – ISIS: After the Islamic State captured Ramadi on Sunday, Iraqi PM Abadi decided to deploy Shi'ite militias for a counteroffensive. Iraqi state TV broadcast the arrival of the first group on Monday, Kataib Hezbollah, listed by the U.S. State Department as an FTO in 2009. We feature comments from U.S. officials on the loss of Ramadi, finding them divorced from reality. The Pentagon said it supports having terrorist Shi'ite militias as part of the offensive to recapture Ramadi. In fact, these militias will likely comprise most of the attacking force, because the Iraqi soldiers who fled Ramadi have yet to return. IS propaganda images reveal the retreating soldiers left behind enough heavy weapons, including tanks, armored vehicles and missiles, sufficient for an armored brigade, as well as enough food supplies to last months. Aid groups say 40,000 Sunni refugees have been refused entry to Baghdad for security reasons, and they are living in the rough. IS has been hard at work preparing defensive positions, while the Shi'ites are doing the same about 20 miles away. Despite pressure on Baghdad to press an attack, it appears to be taking time to assemble forces for an attack. Baghdad's other option would lead to an all-out sectarian war. ISIS forces in Iraq face two threats, which we review. ISIS commanders recognize that the best defense is a good offensive. Expect IS commanders to exploit their forces' strength and the government side's weakness.
So, the cycle continues. The US gives the Iraqis top-flight equipment, and the Iraqis abandon it on the battlefield, ceding it to ISIS. You can't make this stuff up. Bob thinks an assault on Baghdad is possible – not a certainty but possible.
At Cumberland, we think there is a growing geopolitical risk premium in oil prices, and factors explained here are part of the reason why. That said, we are still underweight the Energy sector. We also think that the price in the US is high enough to attract continuing domestic supply expansion, albeit at a slower pace. Furthermore, American oil industry productivity is growing, so the marginal cost of additional supply is falling.
Add in the Saudis, who want to give the competition (including Iran and any Shia adversary) a classic “good sweating,” to use the words of John D. Rockefeller, from the old Standard Oil Trust days. Iran is weakened every day when the price of international oil is as low as it is now or goes even lower.
The bottom line is that geopolitics could spike oil higher in the short run. But economic forces are likely to trump geopolitical dynamics and may send prices lower instead. Some longer-term forecasts take the US oil price under $50 for WTI.
We do not know which way this outcome will go. We do know that volatility is high and rising, and risks are in either direction. So we remain underweight the Energy sector in our US ETF managed accounts