Oil Investor and Energy Reports with Kent Moors

Two major events rocked the oil and gas sector this morning.

But they weren’t tied to ubiquitous market volatility or natural disasters.

These were intentional – each a result of human decisions.

Whatever the cause, the result is that we are we are off to the races… and you and I have the opportunity to benefit nicely.

The Embargo Has Begun

First, the European Union (EU) in Brussels passed its anticipated oil embargo against Iran.

The EU also froze assets of the Iranian central bank in Europe. I have recently commented on what this action would mean to the oil markets, even if Tehran does not make good on its threat to close the strategic Strait of Hormuz.

Closing the strait, even for a short time, would lead to the quickest rise in oil prices on record.

But the likelihood of that taking place is uncertain. Iran, after all, gains 80% of its income from oil exports. They would experience a steep financial cut by their own hand.

More certain now are the major crude oil pricing issues that would result from withholding Iranian crude from the European market.

And that one will be happening.

As we await another down day on Wall Street, attention once again turns to weakness on European banks as the culprit.

Actually, that seems to be only half the situation.

Crude oil in New York is poised to move down again this morning, following upon an almost 6% drop yesterday. Brent in London, however, dropped only half that and, despite the bank problems and the ever-present continental debt worries, is going back up again today.

At close yesterday, the spread between the Brent benchmark crude price and WTI (West Texas Intermediate, the benchmark used in NYMEX trading) stood at over 29% of the WTI price.

Remember, as I have mentioned here many times before, WTI is a better grade of oil than Brent. That should mean, if normal market conditions actually dictated trade, WTI prices would be at a premium to Brent. And they were consistently… until last year at this time. For the past twelve months, the reverse has been the case.

Brent Prices Reverse Course

Now, I have also noted before some of the reasons for this, with the primary cause being the fact that Brent is now used as the standard for discounting more actual crude physically traded worldwide than WTI. The vast majority of daily global transactions are in oil having more sulfur content than either of the primary benchmarks. Neither Brent nor WTI, therefore, really represents the world’s stock of crude.

However, of late my curiosity has been poking around elsewhere. How can the effective pricing of Brent remain at such levels, given the fiscal malaise that is Europe?

My initial take on this was presented to the Greek Finance Ministry in late June, during an eventful stay in Athens marked by high humidity and higher tempers in the streets. My preliminary analysis had concluded that as much as 28% of the Greek debt problem had effectively been discounted and transferred into Brent oil futures.

After I gave my briefing, the ministry released a truncated press release holding the rest of Europe responsible for a quarter of the country’s debt mess! That was hardly my intention, but it did give me some reason to consider this further.

Later events have simply reinforced the following observation: The European price for oil is supported by its debt problem.

We have spent so much time treating European debt in isolation – regarding it as a sovereign fiscal problem or a result of undercapitalized banks – that the analysts as a whole have been missing something important.

As the concern over European debt contagion increases, the oil contagion is taking place almost unnoticed.

Oil Trading Moves Off The Market

It happens this way:

Crude oil is a financial asset as well as a commodity. That means the contract has a collateral (and a fungible, for that matter) application. It can be exchanged, leveraged or used to buy and sell other assets. Anything that has this flexibility and has an underlying market value to boot has a larger market presence than simply the contract itself.

Now any financial asset has this utility. Some, such as agricultural commodities (which have a striking parallel to oil contracts in market dynamics), are so well known for doing this that their trade is heavily regulated on exchanges.

There are also the matters of ease of transfer and ready liquidity to purchase. I may have considerable asset value in my house, for example, but it is released only if I can sell it. That is a big unknown in the current market. So what do I do? If I need the cash, I will take out a home equity line of credit.

And that gets us back to the European oil situation.

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Brace yourselves; this is shaping up to be a very rocky week.

Inside the Beltway, the children we call our “leaders” continue to hold their breath and throw temper tantrums in opposite corners.

While the gridlock continues, Asian and European markets are already sending clear signals that the combination of party games in Washington and continuing debt problems on the Continent is eroding asset value and confidence – and fast.

We are beginning to run out of time.

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Speculators in New York won’t be calling the shots anymore. Not in oil, anyway.

The way we price it. The places we trade it. The companies that stand to profit most.

It’s all about to change.

This was confirmed at a meeting I just attended in The City, London’s financial district. I arrived from Moscow’s Domodedovo Airport for an unusual Saturday morning gathering of bankers, traders and analysts called only days before.

The subject? A new oil-pricing index.

This is huge.

More oil-project funding is raised within a three-mile radius of The City’s Liverpool Street train station than anywhere else on Earth. And now they’re preparing to control the oil trade, as well.

This will create all kinds of new ways to make money in oil. Not just with fancy financial instruments designed for the “big boys,” but with retail investments, too. So there’s money in this for you.

For more on the future of crude-oil investing …

MOSCOW - Sergei Kudryashov likes pizza, poker and American jazz. He’s also deputy head of the Russian Ministry of Energy (Minenergo) and former VP at NK Rosneft OAO (LSE: ROSN), the No. 1 state-controlled oil producer.

I’ve known Sergei for almost two decades now. We compare notes whenever I’m in Moscow. This time, I briefed his team on key developments in the international oil markets. And, as usual, I came away from the meetings with some incredibly valuable information – information the public simply can’t get on its own.

So let me share what I’ve just learned. It’s a tremendous opportunity to profit from Russian oil – without investing a dime in the country itself. Indeed, as you’ll see in a minute, there are several ways to make money right here at home.

First, here’s what’s going on.

Western oil majors are about to help Moscow solve its energy problem. And that could be a boon for investors.

The traditional Russian oil fields in Western Siberia are well past peak production. Some satellite fields in the region remain, but the extraction gains will be marginal.

My sources in Russia’s Ministry of Natural Resources and Ecology (MNRE), the government entity responsible for distribution and oversight of development leases, now acknowledge that the country’s overall crude oil production could decline by more than 7% over the next several years.