EP95: Q&A on Long-Term Impacts of War in Iran

WATCH the video on Substack by clicking the play button above or on YouTube (here).STREAM audio only on Apple Podcasts (here), Spotify (here), or your favorite podcast player app.DOWNLOAD a pdf of a lightly edited transcript and the slide deck using the blue Download buttons below.We recorded this video podcast on Wednesday, March 18. This week we address five questions that have arisen regarding our views on the potential long-term impacts of the war in Iran.* Does our Super-Spike oil demand destruction framework need adjusting for an abrupt geopolitical spike?* What advance warning signs are we watching to assess economic damage and risks to capital markets?* How does Iran impact our view of the traditional energy profitability cycle and terminal value recognition?* Does the war change which regions we prefer for future CAPEX?* How does Iran impact our Power Surge (power super-cycle) view?Subscribe to receive all content. Also available at Veriten.com.SLIDE 3: Super-Spike Framework In A Geopolitical Event?Key points:* Our March 2005 “Super-Spike” framework was used to assess how high oil prices could reach in order to slow oil demand growth to levels of available supply in an environment of structurally strong global GDP growth (BRICs expansion).* We chose “super” to indicate the oil upcycle was multi-year in nature. We chose “spike” to remind ourselves and our clients that inevitably oil would surely rollover as cycle dynamics ensured a future period of oversupply (or under-demand).* At the end of the day, the super-cycle is always one of sector profitability, with oil prices just one (important) component along with costs and capital intensity.Current environment:* The War in Iran and closure of the Strait of Hormuz is not analogous to that 2004-2014 period. This is an acute geopolitical disruption.* Therefore, the framework we used over 2004-2014 has its limitations. Most notably, the sudden, dramatic jump in oil prices could mean that absolute levels do not need to reach the heights implied in the table on the right.* It also suggests that “Super Vol” remains the better framing for energy commodity markets, including crude oil, oil products, and global spot LNG prices.* Be wary of perma bears and perma bulls! For the bears: cycles have to play out. For bulls: it is always a cycle.Exhibit 1: “Super-Spike” oil demand destruction frameworkSource: Bloomberg, EIA, Federal Reserve, Veriten.SLIDE 4: What Advance Warning Signs Are We Watching?* Bull to bear can happen quickly and unexpectedly…July to December 2008 saw WTI drop from over $140/bbl to under $40/bbl.* How can one differentiate between the July 2007 collapse of two Bear Stearns credit funds and the March 2023 issues with Silicon Valley Bank?* So why worry this time? The closure of the Strait of Hormuz is simply intolerable if measured in months rather than weeks. The Age of Drones is a game changer, as we see in Russia-Ukraine.* Fortress balance sheet, understanding controls and contracts, and aiming to not only survive but thrive during turmoil is the goal.SLIDE 5: How Does Iran Impact The Profitability CycleKey points:* It remains our view that traditional energy is firmly within a new profitability super-cycle that began in 2021 and would be expected to last 10+ years.* Structural profitability cycles are inherently long-term in nature, 10-15 years up, 10-15 years down. The prior downcycle ran from a 2010 peak to a 2020 trough.* Within the structural up or down cycles, numerous mini-cycles occur along the way. We believe 2025 marked a “normal” trough following a 2.5 years mini-downcycle.* We rejected “oil glut” arguments that have prevailed since Liberation Day (April 2025). We agree that the closure of the Strait of Hormuz renders impossible a true accounting of who was right—oil glutters or us.Current environment:* We have been surprised by the fact that capital discipline at the sector level has remained intact.* A true, multi-year upcycle would undoubtedly test discipline. But let’s judge it as we go: so far, so good.* The main risk to seeing a “deep trough” (as opposed to normal) would be an extended closure of the Strait and a collapse in the global economy. We take this risk seriously.* The best case scenario for the profitability cycle would be a quick re-opening that ensured limited adverse global GDP impacts.Exhibit 2: Traditional energy sector profitabilitySource: Bloomberg, FactSet, VeritenSLIDE 6: Does The War Change Regional CAPEX Preferences?* There are no absolutes…it is all opportunity specific.* Oil exploration: Algeria vs UK North Sea circa 1991-1994.* Natural gas import infrastructure: New York state (Appalachia) versus Germany (Russia).* Many areas of the Middle East will attract capital irrespective of how this plays out.* Between COVID, Russia-Ukraine, and now Strait of Hormuz, supply chain security will remain ascendent as an issue. Positive for NAM, power, energy source diversification (new and old tech).SLIDE 7: What Impact Is There On Our Power Surge View?* If a general financial/credit crisis materializes, this is a sector that commonly uses leverage and is now in growth mode.* There will be winners and there will be losers.* Execution: Understanding contracts, supply chains, and liquidity are all critical.* At the end of the day, Power Surge we think persists beyond and through this war due to the need to grow power generation to address aging western world grids, industrial reshoring, electrification, and AI & digital transformation.⚡️On A Personal Note: Super-Spike ReactionsFor On A Personal Note, we refer you to the video where Arjun further reflects on his March 30, 2005 “Super-Spike period may be upon us” report.📜 Credits* Intro & Outro music: Wolf Hoffman: Concerto for 2 Cellos in G Minor, Rv 531: I. Allegro Moderato.* This episode of Super-Spiked Videopods was edited and produced by Veriten Productions.⚖️DisclaimerI certify that these are my personal, strongly held views at the time of this post. My views are my own and not attributable to any affiliation, past or present. This is not an investment newsletter and there is no financial advice explicitly or implicitly provided here. My views can and will change in the future as warranted by updated analyses and developments. Some of my comments are made in jest for entertainment purposes; I sincerely mean no offense to anyone that takes issue. This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit arjunmurti.substack.com