Dear Reader,
HORMUZ WAS FIRST. Now the Petroline is gone too.
On September 10, Iran-aligned drones launched from Iraqi territory struck Saudi Arabia's East-West pipeline, the 1,200-kilometer Petroline that had been their backup crude export route after Hormuz became a war zone. Saudi Arabia shut it down. Immediately.
As I write this, Brent crude is trading at $107.68 a barrel. Goldman Sachs is flagging $120. The IEA says global oil inventories have drawn down 507 million barrels since this war began. That is not a number. That is a reckoning.
Inside today's issue:
- The Last Route Gone: How the Petroline attack sealed off Saudi Arabia's final export option and what a world running on 507 million fewer barrels of inventory actually looks like.
- The Fed's Trap: The FOMC meets today. Hike into $107 oil and you crack the economy. Hold and inflation runs hotter. There is no good door here.
- Your Escape Hatch: What the mainstream press calls a crisis, I call a confirmation. Here is what matters when paper promises meet real pipelines.
- Larry Benedict: Oil Skimming: Larry Benedict just released a new presentation on a strategy called "Oil Skimming." It's worth a look. (Brownstone Research)
THE LAST ROUTE GONE
I have been studying financial history for fifty years. Empires always look most secure right before the supply chains crack.
Here is what happened. The U.S.-Israel war on Iran started February 28. Hormuz traffic collapsed immediately. Saudi Arabia had one backup plan: the East-West pipeline. The Petroline runs 1,200 kilometers from Abqaiq on the Gulf to Yanbu on the Red Sea, bypassing the Strait entirely.
On September 10, Iran-backed militias in Iraq removed that plan from the board.
Now think about what that means. Before February, Brent traded at $72 a barrel. By March it hit $119. It pulled back when peace rumors swirled. Then the Petroline went dark. Brent is back at $107 and climbing.
The IEA counted the damage in September's Oil Market Report: 507 million barrels drawn from global inventories since the conflict started. That is averaging 2.8 million barrels per day out of storage. The IEA's own analysts said spare production capacity is, and I am quoting directly, "effectively gone."
"Both the Strait of Hormuz and the Red Sea corridor are simultaneously compromised. The IEA judges spare production capacity is effectively gone, leaving markets dependent on depleting inventory buffers."
THE FED'S TRAP
The Federal Reserve meets today. Decision lands tomorrow, September 16.
CME FedWatch puts the odds of a 25-basis-point hike at roughly 60%. Macquarie already moved their call to September. Inflation Insights says expect the hike "unless the labor market collapses."
Here is the trap they built for themselves.
If they hike: borrowing costs go up in an economy already absorbing $107 oil. Gas prices are at all-time highs. Every business that uses fuel, moves goods, heats buildings is already getting squeezed. A rate hike on top of that is a hammer on a bruised hand.
If they hold: inflation accelerates. Oil at $107 flows through to everything. Food, transport, manufacturing. The dollar quietly loses purchasing power while the Fed issues statements about "data dependency."
They created this situation. Forty years of easy money, $40 trillion in national debt, zero real energy independence strategy. And now they are going to pick a door. There is no good one.
My rich dad told me something I have never forgotten: "When the system has no good answers, the people with real assets stop worrying about the system."
Here is the number that changes everything about how I am thinking right now. I will show you after this message from our sponsor.
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YOUR ESCAPE HATCH
That number is gold at $4,284.
Yesterday gold sold off. Down $54 in a single session. Why? Because the market is pricing in the Fed hike. Higher rates mean a stronger dollar, and a stronger dollar is historically a headwind for gold. That is the conventional story.
Here is what the conventional story is missing.
The Fed cannot hike its way out of a supply shock. Higher rates do not put oil back in pipelines. They do not reopen the Strait of Hormuz. They do not refill 507 million barrels of inventory. What they do is slow growth while inflation stays sticky. That is the 1970s. And in the 1970s, gold went from $35 to $850.
Silver is at $63. Goldman Sachs has a year-end gold target of $4,900. JPMorgan says $4,500 by Q4. These are not fringe predictions. These are the biggest banks on the planet telling you where the capital is going.
I have been buying gold since 1971 when Nixon closed the gold window. I have seen this movie. When governments run out of good policy options, real assets are not a trade. They are a life raft.
Pigs get fat. Hogs get slaughtered. Do not wait for $150 oil to figure out you needed hard assets yesterday.
To your freedom,
Robert Kiyosaki
Author, Rich Dad Poor Dad
P.S. Oil at $107 is not just a geopolitical story. Larry Benedict has been trading oil markets for over 30 years, and he just put together a presentation on a strategy he calls "Oil Skimming." It is built for exactly this kind of volatility. Click here to see how it works.