The Iranian 'War Premium' Vanishes from Crude Oil

Nearly two years ago, on January 10^th, 2006, Iranian leader Mahmoud Ahmadinejad raised the stakes in a battle of wits between Tehran and the Bush administration, ordering the removal of UN seals on centrifuges to enrich uranium, a process which can make atomic reactor fuel or weapons-grade material. “We are not going to yield to pressure to abandon our rights, and we have the necessary tools to protect ourselves,” Ahmadinejad told the Qatari foreign minister.

Ahmadinejad’s daring move quickly set off a “war of words” with US President George Bush and vice-president Dick Cheney, which in turn, built-up an Iranian “war premium” of roughly $12 per barrel into the price of crude oil. On January 19, 2006, Cheney warned, “Whether or not there would be a spike in the price of oil, if in fact there is some kind of a crisis with Iran is entirely possible. But I think the consequences of that would be less significant than the consequences of having Mahmoud Ahmadinejad armed with nuclear weapons,” Cheney told CNBC.

The unrelenting “war of words” between Tehran and the Washington neocons reached a climax on Oct 17, 2007, when Bush suggested that if Iran obtained nuclear weapons, it could lead to war. “I’ve told people that if you’re interested in avoiding World War III, it seems like you ought to be interested in preventing Iran from having the knowledge necessary to make a nuclear weapon,” he warned.

But on Dec 3^rd, the latest US National Intelligence Estimate was released, and effectively destroyed a four-year diplomatic effort by the Bush administration to isolate Iran over its nuclear weapons program. The US spy agencies have done another 180-degree turn, and now say the mullahs of Iran abandoned their nuclear weapons program in 2003, lifting the American military axe from over Iran’s nuclear and economic infrastructure.

The Pentagon’s top brass, led by chairman of the US Joint Chiefs of Staff Admiral Michael Mullen, US defense chief Robert Gates and Admiral William Fallon, commander of the US Central Command, rubber stamped a US spy report, that squashed mounting speculation of a US aerial attack on Iran during Mr Bush’s final year in the White House. The US military contributes nine of the 16 intelligence agencies whose views are cobbled together into the NIE.

Tehran knows it holds the ultimate “trump card”, in its high stakes confrontation with the Bush clan. In March 2005, Iranian Expediency Council secretary Mohsen Rezai first raised the prospect of Iranian retaliation against all Middle Eastern oil exports. “An attack on Iran will be tantamount to endangering Saudi Arabia, Kuwait and in a word, the entire Middle East oil. Iran could easily block the Straits of Hormuz and use its missiles to strike tankers and GCC oil facilities,” he warned.

About 40% of the world’s crude oil exports pass through the two-mile wide channel of the strategic Straits of Hormuz, with Iranian military forces deployed at the head of the channel. Seeking to avoid a spike in crude oil to $200 per barrel, the Bush administration pursued a dual track policy of “psychological warfare” with Iran through the media, while trying to enlist other nations to enact economic sanctions against Iran, in a failed effort to stop Iran’s quest for nuclear invincibility.

Just 18% of American voters believe the NIE claim that Iran has halted its nuclear weapons program. The latest Rasmussen Reports national telephone survey found that 66% disagree and say Iran has not stopped its nuclear weapons program. But the odds of a US / Israeli strike on Iran before December 2008, according to online futures markets, have plummeted from 50% in November to 18% today.

The other casinos where bets on war in the Middle East are made each day are the crude oil markets in London and New York. “The market is increasingly driven by forces beyond OPEC’s control, by geopolitical events and the growing influence of financial investors,” said Mohammed bin Dhaen al-Hamli who is the UAE oil minister.

Just prior to the bombshell NIE report, there was erroneous speculation that Saudi Arabia would agree to increase in its daily oil output by anywhere from 500,000 to 750,000 bpd, as a gift to its military patron in Washington. Speculation of a Saudi oil output hike knocked the price of crude oil from a record high of $99.25 /barrel on Nov 26^th, to around $87 /barrel a week or so later, but in retrospect, the slide in oil prices was simply wiping out the $12 /barrel Iranian “war premium”.

On Dec 5^th, Riyadh sided with the hawks of OPEC – Libya, Iran, and Venezuela, and refused to increase its oil output, citing ample global oil inventories. Saudi king Abdullah had escorted Iranian president Mahmoud Ahmadinejad along a red carpet just two days earlier, and saw eye to eye with his Persian neighbors. “Our position is that demand and supply are balanced and there is no need to increase oil to the market,” said Iranian Oil Minister Gholamhossein Nozari.

Anticipating a tight fisted OPEC this winter, the US Energy Information Agency said on Dec 11^th that global oil demand in Q’1 of 2008 would climb to 87.4 million bpd, up 2% from a year earlier, and exceeding global supply, forcing oil consuming countries to dip into their emergency oil inventories. “OECD nations will have just 49.3 days of forward crude oil supply cover by February 2008, the lowest inventory buffer since December 2004, as demand growth outpaces supply” the EIA warned.

The Saudi shift into the hawkish camp of OPEC threatens to unravel the latest recovery in the Dow Jones Industrials, which rallied 1,000-points towards the 13,800 level, on high hopes that crude oil had topped out, and would slide towards $75 per barrel. Instead, OPEC’s hard-line put a floor under crude oil at $87 /barrel, and “black gold” zoomed above $90 per barrel a week later, after the Bernanke Fed lowered the fed funds rate to 4.25%, and announced a plan to inject tens of billions of dollars into the banking system, whetting the appetite of crude oil speculators, and investors seeking a hedge against monetary inflation.

To make matters worse, internal oil consumption in the five biggest oil exporting nations - Saudi Arabia, Russia, Norway, Iran and the United Arab Emirates is growing at a 6% annualized rate, forcing their governments to reduce oil exports by 3 percent. If sustained, that could reduce their crude oil exports as much as 2.5 million barrels a day by the end of 2010.

As a consequence, “Oil prices will hit $100 a barrel before dipping to $80,” Texas oilman and trader T. Boone Pickens predicted on Dec 11th. “Get ready for $100, it is coming up. A hundred dollars will come before $80. You’ll see $100 oil within the next six months. A hundred dollars is going to become routine,” he declared.

Comments

[Georealist]

Difficult to know where to start with this shell of an article. First...The seminal event of the Iranian Nuclear Scare (and the one that may still come back to haunt Iran in the future) was Ahmadinejad's public, and clear, assertion Isreal should be wiped off the face of the political map. This set the context into which all other information was then placed...and started a war of words which Washington used to mollify Israel (and rightly so..since in and of itself Ahmadinejad's assertion was an act of War).
Second...The crude "premium" was/is there for a number of reasons..MEND in Nigeria...Iraq...last Summers Israeli/Hezbollah conflict...the list is endless. The idea that the "premium" is that large based on Iran alone is akin to the ill founded and hystero-inducing garbage about them starting a rival Bourse. Remember that one?
Third..closing the Straits on Hormuz means missle on Tehran..period. End of Iran as a theocracy...eventually the Straits open..and everyone is rid of a large headache. Russia would do nothing but lick their chops over the endless geopolitical opportunities.
Finally...there is not a single investible idea in the article. Oil is high, and the Saudis and others aren't putting more on the market, because they no longer can. Peak production has come and gone and they know it. Trying to sustain increased production would only show up in the numbers soon and the cat would be out of the bag.

[jack kreg]

I would have liked to see you address the combined effects of war markups and interest rate cuts on the price of oil. Very recent financial news, namely coordinated funding by major central bankers of Billions into the global banking system. Now, it is not just the US dollar, but also the EU is injecting liquidity. This boads for significant upside in oil prices, as do the supply/demand tensions. However, perhaps the war markup is diminishing. No airstrikes on Iran, Iraq is stabilizing, the positives, while the 1/2 century old Isreal/Palistine conflict and Lebonon are the negatives. Still the major trend in the war markup may have the effect of reducing the price of oil over the coming few years.

[Georealist]

Jack ...Your multiple questions only point to the lack of forethought in Mr. Dorsch's article. As they say in Texas..it's all hat and no cattle. Focus only on supply and demand..and take longer term positions. Look to Canadian trusts..MLPs in the US..EPD...LINE..etc. A safe supply is a safe income stream and future. Mr. Dorsch..like many others on this site..is more interested in having his picture shown and pretending to know the facts than giving Alpha readers a viable roadmap. If he wishes to dispute this point and go into the issue have at it...few have the fortitude or the guts.

[jmmx]

THE REPUBLICANS ARE WH0RES TO THE OIL INDUSTRY

From NY Times

WASHINGTON — Pared-down energy legislation cleared the Senate on Thursday by a wide margin after the oil industry and utilities succeeded in stripping out provisions that would have cost them billions of dollars.

The legislation still contains a landmark increase in fuel-economy standards for vehicles and a huge boost for alternative fuels. But a $13 billion tax increase on oil companies and a requirement that utilities nationwide produce 15 percent of their electricity from renewable sources were left on the floor to secure Republican votes for the package.

----

To hell with global warming - the poor oil companies need charity from the american people in order to survive!!!!

The republicans continue to give liberal handouts of taxpayer $$$ to the oil companies which are making record profits!

DISGUSTING!!!!

[User 130406]

The oil industry is a cyclical business, meaning they lost massive amounts of money during the 80s and 90s which is now being partially replaced in this decade. No one bitches and moans when gold prices rise because that is the nature of cyclical business, sometimes flush and sometimes bust. Taxing only makes the problems worse. The fact is that US oil production is declining while our demand is growing so we need high prices to lower demand. The liberal congress is proposing taxes that will only hurt the small independent oil companies that produce most US oil and natural gas, and these companies do not earn enough to grin and bear it like an Exxon or Chevron, they will go under like they did in the 80s and become forced to sell at extremely discounted prices to companies like Exxon and Chevron who will not put the time and energy into the small projects because they have bigger and more profitable projects. When oil prices reached record highs recently, we paid the same prices as a few months ago and those same "horrible" oil companies lost money in their refining businesses so we would not have drastic price increases or collapses, to keep things stable. And quite frankly, people have got used to it because oil prices are the one commodity that has not inflated throughout time. Prices now are still not as bad as during the oil crisises of the late 70s and early 1980. Also, this so called energy bill tried to cut off the most prospective areas of the US for natural gas development at a time when we are no longer able to supply our natural gas demand and must take in LNG imports. Natural Gas is a clean burning fuel. Yet, Democrats feel that ethanol is better even though the US people have to hand an extra 51 cents per gallon in subsidies,while paying more at the pump for less mileage while facing higher food prices caused by ethanols effects on the corn markets, which could cause famine and starvation among thousands of people who depend on our food exports. THAT IS DISGUSTING considering that there are people starving already everyday yet liberals would rather burn food in their engines then to export it to starving children overseas. Also, If liberals pull the US out of Iraq, Iran or Al Qaeda will take over the country eventually causing World War III at the sacrifice of millions of lives. I honestly wonder whether liberals care that their play for power in the US could eventually cause so much pain. Hell everyday Al Qaeda receives more reason to keep fighting everytime they watch our news. I know that liberals don't care that they could have contributed to the deaths of our soliders. They would rather fly a jet over to Venezuela to meet and greet with communists, while bashing Bush with their dictator, who makes money from selling our country overpriced oil. They are borderline traitors. I honestly hope that they pay for the pain they 've caused. Yet those same assholes come back to the US and make money off our people. If your communists, then why don 't you spread your money equally among the US Sean Penn or Barbara Baxter????????? Oh I forgot they are too busy using it to get power over our people and to buy everything they want. WELL seriously FUCK THEM VOTE REPUBLICAN

[User 130406]

Liberals are bigger whores to the new ethanol businesses that some of them helped start. Hell, they are handing these businesses taxpayers money in order to make them profitable so they can get rich. Ethanol companies are some of the leading contributors in US politics among all industries because they realize they would not have a business if it wasn't for taxpayer subsidies given by the same liberals in congress. LOOK UP THE FACTS ethanol gives more cash to congress than oil and oil actually gives the government almost 1 dollar per gallon in taxes instead of stripping it away in subsidies. Everyone in our Congress is a whore that is how they got elected but Democrats are dangerous whores because ethanol can never replace oil and they know it yet they lie to the public so they can pay themselves with taxpayers money.

[User 130406]

MLPs do not properly invest in their upstream assets because they shell out to much cash to investors. Any country that puts oil assets in MLP form will have declining production. We should have learned from the 80s.

[jmmx]

Dear 130406,

I am not arguing in favor of Democrats. Only reacting to today's article at how America's energy policy was changed due to the Republicans supporting the Oil interests.

I do not know much about the ethanol issue you mention, but I am sure that I recently heard Bush touting ethanol.

Respectfully,

Horrified

[BrucePile]

I think the war premium is coming back into oil as of early April. You can see a technical change in behavior in the oil chart coinciding with Admiral Fallon's leaving and a banking war on Iran declared by the U.S. on March 20 effectively blacklisting any global bank doing business with Iran.