Is Oil Sliding or Just Slipping?

With no economic news on Wednesday, oil price movement and company specific news led the headlines. The Petroleum Status Report held a surprise for commodity traders, and had most oil shares giving back some recent gains. Shares of Occidental Petroleum (OXY) fell 3.4%, Nabors Industries (NBR) dropped 1.9%, Exxon Mobil (XOM) sank 3.5% and Halliburton (HAL) fell 2.8%. However, Nigeria is on strike and geopolitical concerns are as hot as ever, more specifically within Gaza where refugees are moving into Israel and Israeli rockets are moving into Gaza. So, we believe this move will prove to be a short term slip rather than a longer slide.

Petroleum Status Report

Wednesday's report showed a greater than anticipated build in oil inventory, and the largest in quite some time. Some 6.9 million barrels were added to the stockpile. This surprise, in light of the very recent run up to $70, had oil backtracking on the day. Gasoline stocks also rose more than expected, despite capacity utilization that is still trailing historical seasonal levels. Apparently the build had a lot to do with increased imports, not usage.

You know, everybody points out that new refineries have not been added to the system in quite some time, but Barry Ritholtz noted Tuesday on Larry Kudlow's show that refineries have expanded operations. Here's where I would normally say, "barring an early hurricane to the Gulf, things should be fine," but Nigeria is on strike and is the driver behind the rise to $70. WTI crude fell about a 1% Wednesday, while brent crude sank some 2%. Gasoline RBOB futures fell about a quarter of a percentage point. Still, I think this was just a slide, because Nigeria is overhanging.

Everything near term depends on Nigeria and how the strike impacts production. If the strike is settled quickly, oil prices should deflate substantially. I cannot foresee Iran getting involved with the Israeli effort underway now in Gaza. It's just not worthwhile for Iran, unless it's planning a massive surprise attack of Iraq as well.

Let's play devil's advocate, shall we? You know, I believe that outside of agreeing to global demands regarding the fuel for its nuclear facilities, Iran's best option is to launch a massive surprise attack on Iraq and Kuwait. Sitting back and waiting to be bombed seems futile, because Iran's traditional military capabilities should be wiped out in a short swipe, this barring third party submarine intervention. In other words, if China or Russia were to intervene in Iran's favor, clearly a world balance altering move, we could lose an important battle. This would mark a drastic change in global politics, begin world war, and is not out of the realm of possibility.

However, it is extremely unlikely. Time is taking us in that direction though, and words from Iran in months past make that clear. Evidence surfaced months ago, when Mahmoud Ahmadinejad made a statement that revealed a major world power was communicating to it something different than it was communicating to the world community. In other words, China or Russia is telling Iran, "don't worry, we won't let them bomb you," or, "we'll stand by you." I can't see Russia backing up those kinds of statements, but China? Or, what if it was a fleet of Iranian submarines, supplied and manned by Russians? Let's hope this is just good fiction. I have concern though, and you would have to be blind to believe Putin or China are your friends.

Comments

[fsaldanha:]

Anyone who thinks Iran could even dream of launching a surprise attack on Iraq and Kuwait is hopelessly insane.

2007 Jun 21 08:44 AM

[Greg Pinelli:]

Kaminis really had me going..just when I thought this might be a serious article he launches into the Iran card as Jokers wild! Why would Iran change a winning game and risk losing the infrastructure that supports their quest as the dominant Middle East player? Russia and China wouldn't lift a finger to help Iran...and Iran would never launch an attack on Kuwait or anyone else because it knows this.
Really..this is low level geopolitical pretense..he must be communicating with "Zman."

2007 Jun 21 12:17 PM