Email

The Iranian Oil Spike

by | published January 6th, 2012

In addition to what I write for Oil & Energy Investor, Energy Advantage, The Energy Inner Circle, and the new Energy Sigma Trader, I also pen the lead Iranian/Iraqi oil and gas analysis for each edition of Thomson Reuters' Caspian Investor.

(It's true – I just can't get enough of this stuff.)

That means I have a unique opportunity today to give my OEI readers a sneak peek at what I'll be telling Thomson's high-priced corporate- and government-level subscribers next week.

It's big.

As you've no doubt noted, crude oil prices have moved up sharply since the beginning of January.

The Brent benchmark set in London is once again approaching $115 a barrel, increasing 3.6% since January 3. Meanwhile, West Texas Intermediate (WTI), set in New York, has been above $103, but increasing at less than half the growth rate of its London counterpart.

The spread between the two is again in double digits, with Brent higher than WTI by some 11%. That is well less than half of what the difference was a month ago… and less than one-third of the figure in mid-October.

However, it is widening again.

And this is a big deal for oil and energy investors like you and me.

A Variety of Factors Impacts Pricing

Even without the geopolitical situation, there have been several factors prompting a rise in prices anyway. Demand is increasing, and inventory is declining, for example, both usually mean an upward pressure.

On the other hand, most pundits have identified the decline of the dollar against the euro as the usual culprit behind price increases.

But this time around, the euro is declining against the greenback.

Meanwhile, both oil prices and the Brent-WTI spread are moving up.

What gives?

Well, Iran is what gives.

Boycott Tensions are Accelerating

This is not a result of the recently concluded Iranian naval exercises or the country's threat to close the Strait of Hormuz.

The oil markets largely discounted both of those factors.

For one thing, Iran could periodically close the strait, but it does not have a large enough navy to introduce a blockade.

And then there is the U.S. Fifth Fleet.

No way would the U.S. tolerate a closure of the largest passage for oil tankers in the world.

Rather, the Iranian impact has actually resulted from an action taken in Europe. There, after much discussion, and with a few wrinkles still to iron out, the European Union has just made a major move.

EU headquarters in Brussels announced on January 4 that the organization's membership had agreed to stop importing oil from Iran.

This is a major blow to Tehran. The EU is currently the second-largest importer of Iranian crude after China. Concerns have been raised over the effect the move will have on prices in the European market.

EU contacts insist that the new sanction will not create serious problems for the continent, but the markets are not so sure.

An “Iranian spike” has pushed prices north in short order.

Here is why this new development is likely to have a significant impact on the oil markets moving forward – one that will provide advantages for us as energy investors.

The Nuclear Sanctions are Starting to Hurt

Tehran cannot combat mounting domestic economic problems without increased sales revenues from crude production.

These sanctions, of course, are aimed at suppressing the Iranian nuclear program. (The West claims that Iran is developing nuclear weapons, while Tehran claims the program is for peaceful energy purposes.)

Until mid-2010, attempts to eliminate foreign involvement in Iranian oil and gas have had some results. But the loss of Western majors merely provided the Chinese an opportunity to move in.

Yet changes in sanctions strategy, beginning in June 2010, started hitting Iran where it hurt: U.S., EU, and UN moves restricted the country's use of international banking.

Access to foreign exchange is essential in a market like oil, where international contracts are denominated in dollars.

Then last summer, U.S. pressure resulted in the closure of several Iranian foreign banks, most noticeably one in Germany, licensed by the German central bank and the conduit for much of Iran's oil sales.

Washington argued (almost certainly correctly) that this small German-registered but Tehran-controlled financial institution was a primary way in which arms were purchased for Iranian use, along with equipment obtained for its nuclear program and assistance sent to augment terrorism abroad, especially by Hezbollah.

These closures dramatically increased Iran's costs of selling its oil and buying the gasoline and heating oil needed back at home. It may be the second-largest exporter of oil in OPEC, but Iran's internal refinery capacity is far too low to meet either an expanding domestic need for processed products or minimum safety levels of product quality.

These earlier sanctions have resulted in a difficulty for others as well.

Indian refineries had problems acquiring Iranian crude. India is a major Asian importer of Iranian oil, but no longer could use a pan-Asian clearing bank to exchange currency. This bank had included Iran, but dropped facilitating its oil deals after pressure from the U.S.

Now, with the latest European decision, Iran may have to find immediate substitute buyers for its already profit-imperiled crude oil, or risk a domestic economic meltdown.

The threat to close the Strait of Hormuz was telegraphed before Europe's boycott of Iranian oil, in the hope the move might prompt Brussels to rethink its strategy.

It did not work.

Two Results Follow This Week's Events

First, Tehran will agree to initiate a new round of dialogue on its nuclear project, open up additional sites for inspection by the Vienna-based (and UN-affiliated) International Atomic Energy Agency (IAEA), and strike a more conciliatory posture.

All of this will be an attempt to gain some time and perhaps delay the EU move.

Few in the West believe it will be genuine.

The second result, however, involves the EU itself. Brussels still has to work out how the boycott will affect the various member markets. Greece, for example, gets a large percentage of its crude from Iran, and a rapid shut-off would merely exacerbate an already serious financial crisis there.

The Spanish domestic picture would also come under pressure.

And then there are the de facto oil swaps in Europe that employ (directly or indirectly) Iranian consignments in contract bridges to stabilize pricing. How much is involved here depends on whom you talk to and where the oil will end up.

I expect additional crude will be coming into the European market from Russia to brunt some of the boycott.

Unfortunately, that simply introduces another energy problem already plaguing the EU.

Too much Western European reliance on Russian natural gas has caused some protracted political reactions in Brussels. Placing any more reliance now on Russian crude would only make things worse.

All of this means the EU is introducing a new approach against Iran that is likely to make the oil markets nervous for some time to come.

On balance, that means – what else? – rising crude prices.

Sincerely,

Kent

Tags:

Please Note: Kent cannot respond to your comments and questions directly. But he can address them in future alerts... so keep an eye on your inbox. If you have a question about your subscription, please email us directly at customerservice@oilandenergyinvestor.com

  1. don day
    January 6th, 2012 at 12:19 | #1

    thanks

  2. Sailor Jo
    January 6th, 2012 at 12:46 | #2

    Mentioned at the end of the article is the European dependence on Russian NG. I agree with the people warning of doing to much business with one partner, any business. But I do not trust Russia to much. Herein lies the opportunity for the producers in the US. But it seems they are dragging their feet when it comes to LNG exports. That is hardly understandable because the reduction in excess capacity would help to bring the prices back up, even if it is sold cheaper than Russian NG.

    Hey US producers, what are you waiting for?

  3. jerry saylor
    January 6th, 2012 at 12:47 | #3

    Mr Moors,

    Many people blieve that the Ero zone will split up and right now it is going into to a recession. How can you be so sure about timing and direction of oil prices. I read every thing I can that you write, but I have my doubts.

  4. Earl Simard
    January 6th, 2012 at 12:49 | #4

    Are your regular subscribers to receive any recommendations from your inner circle?

  5. Jeffery Zunker
    January 6th, 2012 at 13:21 | #5

    How do I get started in investing in oil/energy market? We live in a low income family. Would like to invest to possibly change our family financial situation. Thank you

  6. stuart anderson
    January 6th, 2012 at 13:35 | #6

    Mike lee from Bloomberg News, announces, SAC Capital buys 5.7% into LNG, then states Standard & Poor’s (Cheniere faces cash crunch & may face a default in May.)

    Your comments!

  7. Bernard Durey
    January 6th, 2012 at 14:23 | #7

    The spread between the Bench Mark and West Texas Intermediate is interesting. A few months ago another site thought that that spread would go from around $17 to $46. At that time it went the opposite direction. However,if that spread widens it was that site’s opinion that a refinery in New Mexico stood to be a big profit and place to invest. Although there may have been some confusion about the location of the refinery involed in New Mexico. Be it down in thesouth eastern corner or up in the north western corner. he capacity and how long it would operate at lets say full capacity was in question,also. Back afew years ago the American refineries didn’t want to run at full capacity due to the number of acidents and/or deaths occurring. Sorry about any typographicals and just food for thought as the oil price probably continues to go higher.

  8. Tom K.
    January 6th, 2012 at 18:50 | #8

    Iran may just panic, and say enough is enough, and start firing missile’s at it’s neighbors, saying, if I can’t sell my oil, then neither can you..Or maybe sinking the barges going through the straits…Could get ugly..

  9. Chuck S
    January 6th, 2012 at 19:15 | #9

    Another reason to drill, baby, drill. More US crude would mean less money for Iran, etc, and less of a threat. Drill in Alaska, offshore, etc. Expedite the Keystone XL pipeline. Also more jobs and prosperity for the US.

  10. Dusty
    January 6th, 2012 at 19:48 | #10

    @Jeffery Zunker
    There are guidelines for investing that work for those of us with very small budgets and small amounts of investable money. 2% max of your annual cash actually invested for help, fees, advice: total. 4% or less of your portfolio in a single company/security (except, unavoidably, when just starting). Find a discount on-line broker who does not have a bunch of sneaky little recurring fees. Accumulate $1000 minimum for each ‘buy’ to keep the broker’s fees within limits. Do not do the monthly buy-sell-buy-sell game. Check all potential buys against the charts at BigCharts.com. Begin reading “Seeking Alpha.com” including the comments on the articles. Read this forum for the insight Dr. Kent provides.

  11. Dom
    January 6th, 2012 at 20:17 | #11

    @Jeffery Zunker

    Kind of with Jeff on this one, not sure if this guarantees long-term price increases in oil.

    Could Europe be boycotting Iranian crude because its assuming a recession is imminent and thus demand for oil will fall across the continent? Any thoughts by anyone or Dr Moors would be appreciated, thanks.

    Dom

  12. Dom
    January 6th, 2012 at 20:19 | #12

    Oops…meant to say “with Jerry” on last comment, not Jeff. My apologies on mix up.

  13. eric taylor
    January 7th, 2012 at 19:38 | #13

    I feel $150 dollar oil may be more “rolling recessionary” if left
    in place too long (rolling recessions for S&L bankruptcies in the
    1980′s). The world seems to be there for various reasons now. It will
    likely get worse, but who can stop Germany from success when they
    export more than the U.S., while China exports as much as a country
    with a 5X higher GNP? An imbalance in supply and demand will likely
    be temporary for oil, land natural gas seems to want to glut to excess in the U.S., as I see more willingness to produce natural gas than to use it near term. Oil and gas volatility may run high if the
    fracking fields of dreams are developed too quickly worldwide.

  14. Leslie
    January 7th, 2012 at 19:53 | #14

    How to start taking advantage on this BIG OPPORTUNITY
    Need more info
    How much
    What 2 buy and when 2 buy

  15. dean whitla
    January 12th, 2012 at 13:36 | #15

    what to buy now!–thanks—-

    DKW

  16. Ted Pantelakis
    January 16th, 2012 at 16:52 | #16

    When I read Dr. Kents articles on Energy Investments I became more informed of how and why Oil is so important to invest in. I have taken the step to invest with 4 energy stocks who Dr. Kent recommended and so far the results have gone the opposite direction.. I hear of this oil constriction coming but yet have not witnessed anything happening. I know it’s been only three weeks but the good Dr. also claimed a good chance of it happening before the year 2011 is out. Well,I wonder if he is only concerned with how much money he can make with his advice? Oh, after I joined the energy advantage, then I get more readings why I should join his inner circle. Of course coupled with a higher price tag.. I’m getting nervous with my investments cus my life savings is my buying power. Get it?

  17. Ted Pantelakis
    January 16th, 2012 at 16:54 | #17

    Ted Pantelakis :
    When I read Dr. Kents articles on Energy Investments I became more informed of how and why Oil is so important to invest in. I have taken the step to invest with 4 energy stocks who Dr. Kent recommended and so far the results have gone the opposite direction.. I hear of this oil constriction coming but yet have not witnessed anything happening. I know it’s been only three weeks but the good Dr. also claimed a good chance of it happening before the year 2011 is out. Well,I wonder if he is only concerned with how much money he can make with his advice? Oh, after I joined the energy advantage, then I get more readings why I should join his inner circle. Of course coupled with a higher price tag.. I’m getting nervous with my investments cus my life savings is my buying power. Get it?

  18. January 16th, 2012 at 17:00 | #18

    @Ted Pantelakis
    Made a mistake and did not use the Dr.s last name which is Moors.

  1. No trackbacks yet.
Comments are closed.