Friends,
On January 1 of this year, Brent crude oil traded for $60 per barrel. The first trading day after Operation Epic Fury was launched in Iran, it rose to $82. By this past weekend, it peaked at $113.
When the price of oil doubles in just three months, there are repercussions across the global economy:
- Supply chains requiring oil see costs skyrocket
- The price of goods shipped across the globe rises in tandem
- This risks inflation, which leads the Federal Reserve to consider raising interest rates.
- Because interest rates rise, stocks become less appealing, leading to falling stocks
But before you hit the panic button, there are important caveats to consider.
First, most major geopolitical events cause stocks to fall in a knee-jerk reaction, only to bounce back over the following weeks.
Second, there's an important distinction to make when it comes to the current situation:
- Disruption: This is currently what's happening in the Straight of Hormuz. Nearly 20% of the world's oil (and even more of the ingredients needed for fertilizers that help feed the world) is trapped in the Persian Gulf, unable to get insurance coverage for fear of Iranian strikes.
- Destruction: This is when critical infrastructure for the world's energy is destroyed. The destruction of Qatar's Ras Laffan liquified natural gas (LNG) hub -- which handles 20% of the world's LNG capacity -- is the most pertinent example of this.
The former is painful and inconvenient, causing prices to explode in the short term. But once the disruption is cleared up, supply and demand quickly find equilibrium.
The latter doesn't grab the same headlines, but can be much more destructive to the global economy.
Take Ras Laffan, for instance: it will take an estimated 3-5 years for the hub to be rebuilt.
These dynamics are why markets boomed Monday morning as strikes on Iranian power plants (destruction) were called off, and why the bombing on Iran's Kharg Island left energy infrastructure intact.
While this completely ignores the human toll such conflicts can take, the message for investors is clear: if you're worried about the dominoes falling (rising prices → inflation → higher rates → lower stocks), pay attention to the infrastructure.
No one knows how this will play out. The goal for long-term investors shouldn't be to predict what will happen next. It should be to build a portfolio that can handle whatever comes next by investing in wide moat businesses with clear optionality and management teams with skin in the game.
Very little will ever change that formula over the long run.
Wishing you investing luck in the months ahead,
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Brian Feroldi, Brian Stoffel, & Brian Withers
Long-Term Mindset
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