Oil is undervalued on Middle East Israel Hamas tensions.
Oil's intrinsic value is 107 USD for a barrel of oil in the next 2 to 3 years, according to Wolfteam Ltd.'s estimates. Due to the Israel Hamas conflict the Strait of Hormuz could be closed, which would disrupt the exportation of oil and make a barrel of oil much more expensive to deliver and thus bring up the price of oil.
Shortly said, the possibility of drawn out, stretched military conflict in the Middle East and especially near the Strait of Hormuz raises the intrinsic value of oil.
It is not surprising that the leadership of the United States of America pays frequent visits to Israel, the Gaza strip and the neighboring states which could be dragged into the military encounter.
If the price of oil shoots up in the next two years this would very detrimental to Joe Biden, the current President of the United States' bid for reelection in office.
Interest rates on mortgages are at record rates in both the US and in many countries the world over, which is a tax on the consumer. Higher oil prices, let's say the barrel of oil becomes 100 USD + also act as a tax on the consumer. This double taxation reduces significantly the disposable income of US consumers and thus they become negatively inclined to the current leadership of the US.
The US administration is well aware of that and is making every effort to decrease tensions in Middle East. Wolfteam Ltd.'s view is that tensions will rise further, before they dissipate.
There is a significant probability that other countries neighboring Israel and Gaza could enter the conflict and thus put a huge pressure on the normal supply of oil from the Middle East.
If the Strait of Hormuz is closed for more than 4 months, this could bring the price of oil to 140 USD in the next 1 year.
If the current Middle East tensions escalate further and coincide with escalation of the Russia Ukraine conflict, the price of oil could touch and even surpass 180 USD, according to Wolfteam Ltd.'s estimates. This would make inflation start rising again and cause the Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan to start raising interest rates again, which would cause the global economy to go into recession and could spark social unrest in other regions of the world like Africa, for example. Not only could the world enter recession, but higher interest rates would put pressure on borrowers to repay bank loans. Thus banks will face higher delinquency rates, bad loans will increase and banks will start reporting large losses. Such events coupled with sudden stop of liquidity could evoke a Lehman Brothers moment followed by another Great Recession as the one in 2008-2009. All this hinges on the price of oil, the epitome of a global political tensions indicator, which are usually magnified in the Middle East. Wolfteam Ltd.'s view is that if the price of oil rises significantly above 100 USD, the United States Dollar EUR/USD exchange rate could appreciate to 0.80 in the next 1 to 2 years.
On the horizon is a possible China Taiwan invasion, which would quicken inflation rates again due to disruption to the production and supply of computer and graphical processing chips. Such a development could also raise the probability of a global recession, a deep and protracted one at that.
In addition, gold is also undervalued.
The only thing significantly holding down the price of gold are the high interest rates environment driven by the Federal Reserve, the European Central Bank and other leading central banks.
Otherwise, it is inexplicable how with all that money printing, geopolitical tensions the price of gold is not at it above 2 500 USD.
According to Wolfteam Ltd., gold’s intrinsic value is 2 700 USD in the current environment. The war in the Middle East could spur the price of gold to historic highs.
Add to that the inflation bout the world has witnessed in the last two years and it remains a conundrum why the price of gold has not risen significantly.
Gold is an inflation hedge. But so is Bitcoin, cryptocurrencies it turns out in the last two years. It could be that Bitcoin, crypto’s price rise since the beginning of the year is one of the main factors holding the price of gold down.
It will be interesting to observe the relationship between the price of gold and Bitcoin, their correlation that is.
Central banks have also bought intensively gold in the last three years. India and China, the largest gold consumers have been growing their economies relatively briskly.
In short, there are many more factors that point to the fact that the price of gold should increase markedly.
All in all, gold is significantly undervalued in Wolfteam Ltd.’s view.
The possible gold price rise could take years to come to fruition, though.
The most important thing for policy makers now is to avoid several super-regional conflicts inflaming simultaneously. Inflation rates in such a case could surpass 10-12 % again and the non-negligible probability of a global armed conflict will increase.
What is more, the ESG technology is not developing as fast as envisaged. Several super major oil producers like Exxon Mobil, Chevron and lately Shell and BP have increased their bets on conventional oil by making shale acquisitions or increasing production of oil and gas and distributing more money to future oil and gas exploration. Such possible increase of oil and gas supply could ease oil price rise pressures in the mid to long-term.
In the short-term, however price pressures on oil and also to a large extent natural gas are biased upwards.
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