A series of events are making it highly probably that we are quickly approaching the day when the United States will suddenly attack Iran and oil prices will rise dramatically.  This type of scenario makes it the right time to invest in oil exchange traded funds: United States Oil Fund LP [NYSE:USO], United States 12 Month Oil Fund, LP [NYSE:USL], and iPath S&P GSCI Crude Oil Total Return [NYSE:OIL].

Here are the events of the day:

• Iran has shifted away from the dollar to the euro, and is now bragging that they have already gained 5 billion on that deal.  The last time a nation did this was Iraq, just months before the United States attacked.  Iran’s move may encourage several other countries to follow in their footsteps, to the detriment of U.S. economic interests.
• Iran is conducting five days of war games warning the United States and Israel against attacks.  Knowing that their government has become widely unpopular since the violent oppression of political protestors, Iran’s defiant actions suggest they are becoming aware and defensive about the real possibility of attack.
• Despite some concessions, the Iranian government in the aftermath of its elections is now as untrustworthy to the world community as it has ever been.  Now more than ever, Iran will not be trusted when it comes to their assurances that their government is not engaged in the development of nuclear weapons.
• Conservative critics caught Barack Obama bowing down to world leaders and monarchs in China, Japan and Saudi Arabia, making him appear to be weak and drawing comparisons to one term president Jimmy Carter.  His delayed decision on troop levels in Afghanistan have also weakened his image as commander in chief.
• United States relations with Israel are at a low point, as Prime Minister Benjamin Netanyahu has been defiant against President Barack Obama’s calls against Israeli settlements.  A U.S. attack on Iran can be used as a bargaining chip for a U.S. brokered peace agreement in the Middle East.

In the background of all of this is a falling dollar and evidence of a peak oil situation, where supply hits a peak while demand continues to rise.  The government has consistently underrated both problems, setting up for natural support for oil prices.  But more importantly, we should have respect for the underlying politics involved here.  The president of the United States is starting to look vulnerable and a succesful attack on an unpopular Iranian regime can help make him look stronger while solving several problems.

Oil ETFs have also significantly underperformed the inflation trade while gold has been rising dramatically, suggesting oil to be undervalued on its own.  Of the three ETFs mentioned above, USL tends to outperform the three due to less exposure to contango.