Amid the turmoil in the Middle East, specifically around Iran, Venezuela has quietly slipped out of the conversation. Even major oil companies seem to show little interest in what looks like the country's return to the U.S. sphere of influence.
If the estimation that the country has an average break-even price as high as $80 per barrel, due to the prolonged lack of investment, is correct, it's no wonder. But that doesn't mean U.S. oil companies will come out empty-handed. After all, there may be access to Iranian oil on the horizon, with extraction costs among the lowest in the world, thanks to its mature, high-quality onshore fields. As for the obstacle in the form of poor relations between Washington and Tehran, that could change quickly.
For the third week in a row, Iran has been engulfed in protests following the sharp collapse of the rial and persistently high inflation. What began as economic unrest has quickly taken on a political dimension, with Tehran accusing Washington and Israel of fueling the demonstrations. At the same time, German Chancellor Merz has openly suggested that the Iranian regime could be entering its final days.
Let's assume this scenario unfolds. What comes next?
For now, oil prices are rising due to fears that Tehran may attempt to close the Strait of Hormuz. However, realistically, the likelihood of a total blockade remains low, though not zero. Such a move would severely damage Iran's economy and strain relations with neighboring countries that rely on the strait.
The biggest risk may lie elsewhere. Any direct action by the U.S. against Iran could further strain relations between the U.S. and China. And history shows that heightened tensions between Washington and Beijing tend to put pressure on U.S. stocks, often leading to corrections in the S&P 500, the Dow Jones, and especially the Nasdaq.
On the upside, a swift and targeted operation against Iranian leaders, leaving oil infrastructure intact and followed by a new cooperative government, could even increase global oil supplies. In that case, prices could initially spike on the headlines but then correct downward as additional barrels hit the market. The problem, of course, is that reality is rarely so clear-cut.
It’s also worth keeping in mind that another military operation by the U.S. could accelerate the flight of capital from dollar-denominated assets, particularly Treasury bonds, to alternative investments, including gold.
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