Why Was Oil Up Wednesday?

A plethora of bad news hits the oil market, but the market continues to ignore it.

1) The Energy Information Administration [EIA] releases its July 2008 Short Term Energy Outlook showing that OPEC production will hit 32.7 million barrels per day when the Saudis follow through on its promise to increase production to 9.7 million barrels per day. More supply and less demand over the last six months should not lead to a 50% increase in oil prices.

2) It would seem that not all oil in the world is hard to find after all. The Wall Street Journal reports that oil still seeps to the surface in Kurdistan. The WSJ writes:

"Iraq is well known as one of the planet's last great oil repositories, with more than 115 billion barrels of reserves, by most estimates. The surprise is how much oil -- and easily accessible oil -- there appears to be in Iraq's Kurdish region, a rugged, Switzerland-size area that has seen centuries of conflict but essentially no oil exploration, until now."

3) The Wall Street Journal also reported that Asia, the engine of global demand growth, is starting to slow its consumption as subsidies are removed. The WSJ writes:

"People in some Asian countries are reining in their oil consumption as prices climb and governments unwind subsidies, offering early signs of a shift after years of rapid growth in demand. Asia has been the world's biggest source of new oil demand, with China alone accounting for half the world's increase this year. Government subsidies have kept retail prices in the region artificially low, encouraging consumption."

4) Oil production in China surprised to the upside in the first half of 2008 according to FIG Research.

"The country’s crude output for June hit 15.92 million tonnes which is a 1.3% jump compared with last year. Upgrading of fields in the west has enabled China to offset depletion of crude production in mature fields in the east."

"Growth in crude production paled in comparison to the advances made by the country’s natural gas output. During the first half of the year, China’s natural gas production leapt 17.3% to 43 billion cubic metres compared with a year ago. In June, the country produced 7.8 billion cubic metres of natural gas, up by 14.5% versus a year ago."

Instead the market remains fixated on a mythical Israeli attack on Iran. Does the market feel that the Israeli air force will miss the nuclear facilities and hit the oil infrastructure instead? Or does it fear that the United States will be unable to defend our allies' oil facilities and/or prevent Iran from closing the Strait of Hormuz?

Neither scenario is likely except in the fertile minds of traders looking for another reason to keep the gravy train rolling along. While the Strait looks tiny on a map, it is 21 miles wide at its narrowest point. This is roughly the distance between the New York Mercantile Exchange in Lower Manhattan and Great Neck, N.Y., a tony suburb on Long Island where many oil traders no doubt live.

Another mitigating factor is that our fleet would only have to defend a "two-mile wide channel for inbound and outbound tanker traffic, as well as a two-mile wide buffer zone," according to the EIA. I would be disappointed as a taxpayer if our Navy couldn't handle this job.

We also have a Strategic Petroleum Reserve [SPR] that we have built up to cover the disruption of any oil supply. If we take two million barrels a day out of the SPR it would last almost two years. Any supply disruption should last only for a short time.

Comments

[tuj]

Dude, if the Iranians wanted to close the Strait, they could. You need to look at the last set of war games in which Van Riper sank half the US fleet in the first 10 minutes using Iranian swarming tactics.

You clearly have no idea of the Iranian anti-ship missile capabilities; go look up the range of an Exocet and see how puny that 20 mi. looks in comparison.

[Eric Fox]

tuj...war games are not reality. Swarming will not work when the Fleet is under real war conditions because they will sink any ship, no matter how small it is, if it gets too close. I am more worried about them sending a commercial airliner packed with explosives and overflying our fleet, and daring the U.S. to shoot down what may be a plane with civilians.

There is also a 5.5 million barrel per day pipeline in Saudi Arabia that can be used to back up any disruption in the Strait.

Also, it is not clear that Iran will attack U.S. forces if Israel attacks them, despite its bluster in the media. This would give the U.S. the excuse to counterattack which is something that war hawks in the Bush Administration would love to do. The Exocet may cause serious damage but so can 1000 sorties a day against non oil industrial targets in Iran - destroying the Iranian economy would weaken the regime considerably.

[mangolfer]

Good article. Make sure the speculators read it. Also, my money would be on the US Navy vs. Iran.

[john s. gordon]

don't forget the iranian government is totally unhinged - they are suicidal armageddonists & would love to bring humanity to an end.
> jack

[tuj]

1000 sorties a day against Iranian targets will do only one thing: unite the Iranians. Don't forget the Iranians can fight their battles by proxy through their anti-Zionist groups they support.

The idea that the US can somehow make the Iranians capitulate through airstrikes is naive. And a ground offensive... well it would be bad. Saddam made the mistake in the 80's of under-estimating the Iranians will-to-fight despite their lack of preparedness following the Revolution. The Iranians have twice as many people as Iran, and 70% of them are under 30.

Iran is NOT going to attack Israel as a first-strike; why people keep saying this baffles me. They may talk crazy, but that's mainly for domestic purposes. Believe it or not, the Iranians are smarter than we tend to give them credit for.

[tuj]

"Swarming will not work when the Fleet is under real war conditions because they will sink any ship, no matter how small it is, if it gets too close."

Yeah? I guess that's what happened with those Iranian speedboats a few months back? Or with the USS Cole? Van Riper quit the MC02 games because they WEREN'T reflecting what he felt was reality. He felt they were contributing to a scripted play that reinforced the notion that US tactics were unbeatable. That is a very dangerous game to play.

As for sinking 5000 small speedboats, again, you don't understand how this works. An AEGIS cruiser can't track all those targets; that's exactly why Van Riper did what he did. It overwhelmed the C&C, as well as launching a massive salvo of anti-ship missiles. If you think Sea Sparrows and Phalanx systems will stop that; it won't. They are designed to stop a few missiles, not a massive salvo. Add to this already overwhelmed C&C and you've got massive confusion.

If the Iranians managed to sink just one carrier, they kill 5000 US servicemen. And a carrier is a really big radar target.

[mangolfer]

I gotta believe every vessel sitting in the middle east is on "high alert" and battle ready 24/7 now days. My money, still on US firepower vs. theirs....

[paultaut]

A couple of years ago the Iranians were showing their Naval Might. They unveiled torpedos able to travel at 200MPH. That's over 3 miles a minute folks. Launch a 1000 of these from helicopters, speed boats, on shore facilities, whatever. Its total line of sight, point and shoot, no electronics will be able to stop them all. Particularily, if its just a propulsion sytem with explosives up front.

Personally, I believe Iran has been stockpiling for the oncoming assault. It sure hasn't used their Oil money to help its people or to build their own refineries.

[User 141176]

Tuj...Is a carrier necessary to carry out air strikes? I don't think it is. As for speedboats, I think the one's I've seen in news photos are the Zodiac type, which are rubber. Rubber doesn't win against 20mm machine guns from numerous defensive ships. 20MM is a pretty big caliber I think, when it's coming at you 500 rounds a minute. About the mass firing of exocet missiles, you might have a point. Do they have a "swarm" of exocets? I don't know. The US Fleet has a swarm of anything they need though, not to mention the swarm from USAF bases in Iraq and other places. How about the swarm from Iowa with no-see-um B-2s. Oh wait, there's the swarm from Diego Garcia. I think B-52's can still get to Iran. Wait - they don't actually have to get to Iran, they can launch cruise missles from somewhere else. Oh yeah - from submarines too. Iran whoopin the US Navy & Air Force? You're joking. Would Iran capitulate? No, but they might regret using the exocet. My concern would be more along the lines of Mr. Fox - Iran sends a bomber designed as a commercial airliner filled with people. But, if the people are willing to die as a bomber, they should be prepared to die as a target of F-18s as well. USS Cole wasn't a swarm. That was a sneak. If they're so smart over there in Persia, they will surely recognize that we are still able to open a few cans of whoop ass, with or without France.

[usbworks]

Eric your years of clicking keys on a keyboard hardly qualifies you to make Strait of Hormuz predictions in the event of an Israeli strike on Iran. And it shows...

Stick to where your experience lies and you won't come across as an idiot.

[tuj]

"If they're so smart over there in Persia, they will surely recognize that we are still able to open a few cans of whoop ass, with or without France."

Indeed they do, and the Iranians make no pretensions about defeating the US military on its own terms. No one in their right mind would. Instead, we've seen that insurgency warfare is able to adapt at attack in asymmetrical ways.

Yes we can bomb Iran. But its almost impossible that we can take out their nuclear facilities; check out Global Security's overview.

Am I saying that the Iranians are going to 'defeat' our Navy or Air Force? No, but I am saying that the consequences and risks of military action against Iran are MUCH MUCH higher than they are being presented. Iran has purchased top-of-the-line SAM's from Russia that supposedly have anti-stealth capabilities, and we've already seen that the F-117 'Stealth' fighter is vulnerable to older longer-wave radars (remember the Balkans?).

And like I said, our own war-games, along with the conflict in the Falklands, showed that cheap anti-ship missiles can be surprisingly effective. And the Iranians have purchased better missiles than the Exocet, including Russian models that have a special 'anti-carrier' mode.

The US does have the best weapons, no one disputes this. But fighting Iran is not like fighting Iraq in 1991, where we can expect only triple-digit casualties. An air campaign using only B-2's and sub-launched cruise missiles would be very limited in scope (we don't have a 'swarm' of B-2's, we have twenty of them). As for sub's in the Gulf, its not very deep, making it a very bad place for sub operations, and a very good place for ASW.

If Iran doesn't want to fight back directly, they can start arming groups in Iraq, Lebanon, Palestine, and Afghanistan with more sophisticated weapons and giving them more funding. We've got troops on the ground in two of those countries that would be vulnerable to attacks.

Long story short: its not a free lunch.

[MinneB]

Can't believe this article. Oil was not up on Wednesday. It closed flat. Up 1 cent.

[oldtrdr]

Eric,

It wouldn't take an open shoot-out in the middle of the Straits to close 'em. Think about 1...maybe 2 tankers....manned by skeleton crews of the "faithful", equipped with scuttling charges...get the picture?

jan

[Eric Fox]

tuj..."1000 sorties a day against Iranian targets will do only one thing: unite the Iranians."

yes it will unite them temporarily but when everything settles down the economy will be a wreck, and this will weaken the govt. Not everyone in Iran is a fanatic.

The war games you brought up were conducted in 2002 I believe. I hope our Navy has learned from them if our forces did poorly.

I don't think its feasible to think that Iran will send 5000 speedboats out to confront us. I am sure they will use this tactic but 5000?

[Eric Fox]

The Cole was rammed by a smaller boat during peacetime before 9/11/01 when it was in harbor in Yemen. According to Wikipedia "It was reported that the boat was so close that the attackers (trying to appear friendly) aboard the boat and the sailors greeted each other before the blast." And the ship did not sink either.

When the fleet is on a war footing, I would think it would be difficult for a ship to approach a naval vessel. I'm thinking that aside from whatever electronic systems we use, I would have dozens of sailors on deck with binoculars.

Our fleet is arranged with the carrier at the middle with concentric rings of other ships surrounding it for protection.

[Eric Fox]

paultaut..Iran is building 7 refineries

www.payvand.com/news/0...

minnebe..."Can't believe this article. Oil was not up on Wednesday. It closed flat. Up 1 cent."

When I wrote the article in the morning, oil was up. Seeking Alpha publishes at its discretion.

[Eric Fox]

usbworks...stop calling me names. Say something intelligent and maybe you can change my mind.

[Eric Fox]

I just read this:

"Most of the people on the U.S. side assumed that the adversary in the game would be Iraq, but according to a Nova show on PBS, it was later revealed that the other side was simulating the military forces of Israel, since U.S. military officials felt it was the only state in the region that would be a worthy adversary for American military power."

Maybe that's why we lost !!!

[User 224526]

You want to see PROOF that Oil pricing is a "SCAM".....

Take a look at some of the futures prices of a barrel of oil.

futures.tradingcharts....

Do you see a pattern there?

Look at the 2012 future prices for a barrel of oil...they are trading in the $70's

2012 will be "election season"....

Speculators don't want to touch buying it...if we were really living in a "tight" market....and $150/$200 a barrel is here to stay...That's the BEST deal OF THE CENTURY you could find, you could TRIPLE your investment in 4 short years...what other investment exists with that kind of "guarantee".... 300% return in 4 years....?!

Why are people not buying up those futures contracts as fast as
they can?

You want further proof?!
How and why would a COMMODITY price...we're talking a COMMODITY, have $4-$5 swings in a matter of HOURS...that's a 3% price swing within HOURS of trading in a single DAY!!

Because the price is FALSELY inflated....and Oil Pricing is a SCAM manipulated on the ICE markets.

Has EVERYONE completely forgotten (or IGNORED) history? We've seen this EXACT SAME THING when Enron was around.
They were the Market makers and they manipulated the market to their whim......Anyone remember Dick Cheney saying "we can't pull anymore kilowatts", yet Enron was shutting down Power plants in California, to close grids and falsely increase demands on the rest of the grid...


it is the EXACT same thing ICE is doing.

Eliminate the Graham/Enron loophole, put more transparency on ICE Markets, and a price of a barrel falls in HALF, OVERNIGHT

I'll bet EVERYTHING I OWN on it.

[tuj]

Late response, but please check out this link on the MC02 games. www.armytimes.com/lega...

Also, google Iranian Swarming Techniques. They've been training to use the same tactics. You can argue that the Navy would simply sink everything near them, but the fact of the matter is that there are A LOT of merchant ships in the Gulf. This creates much radar clutter and C&C issues.

What I worry about is that we didn't LEARN from the MC02 games, and we let people like Van Riper go, rather than let them use their creativity to let OPFOR do their best.

BTW, Van Riper was most likely simulating Iran, not Israel.

"Van Riper used motorcycle messengers to transmit orders, negating Blue’s high-tech eavesdropping capabilities, Oakley said. Then, when the Blue fleet sailed into the Persian Gulf early in the experiment, Van Riper’s forces surrounded the ships with small boats and planes sailing and flying in apparently innocuous circles.

When the Blue commander issued an ultimatum to Red to surrender or face destruction, Van Riper took the initiative, issuing attack orders via the morning call to prayer broadcast from the minarets of his country’s mosques. His force’s small boats and aircraft sped into action

“By that time there wasn’t enough time left to intercept them,” Oakley said. As a result of Van Riper’s cunning, much of the Blue navy ended up at the bottom of the ocean. The Joint Forces Command officials had to stop the exercise and “refloat” the fleet in order to continue, Oakley said.

[User 224526]

If you didn't believe me with my first teaser....trying reading these articles...

About ICE,IntercontinentalEx... Inc.


Ice, Ice Baby Part 1
www.star-telegram.com/...

Ice, Ice Baby Part 2
www.star-telegram.com/...


Here are some teaser quotes:


When Enron failed and took its private, unregulated energy exchange to the grave, another rose to take its place. The Intercontinental Exchange (ICE) was the brainchild of
Morgan Stanley,
Goldman Sachs,
British Petroleum,
Deutsche Bank,
Dean Witter,
Royal Dutch Shell,
SG Investment Bank and
Totalfina.

In 2001 ICE purchased the International Petroleum Exchange in London; renamed ICE Futures, it now operates as an "exempt commercial market" under section 2(H)(3) of the Commodity Exchange Act. As the Senate hearings pointed out in the summer of 2006, "Both markets operate outside of any CFTC oversight."

www.star-telegram.com/...
We started as a society that worships hard labor and the basic business ethic of building value into the goods you create. How’d we get from there to worshiping Wall Street’s billion-dollar boys — who create nothing, build nothing, own nothing and deliver no goods, and yet can throw so much money into products made by others that they determine what we consumers will pay for those goods?

Oil Movements tracks every tanker at sea, from both OPEC and non-OPEC oil countries, along with their cargoes’ final destinations. Anne O’Shea responded immediately to my request with their report dated May 8, 2008. Just so you will know, oil shipments are up from a year ago in almost every class, including Middle East oil in transit and Non-OPEC in Transit. The only class of oil shipment that has declined is covered on page 3 of that report. That chart is labeled, "4-Week Changes in Westbound Oil at Sea."

That’s right, shipments of oil headed west have shown serious declines during the month of April, down 800,000 barrels per day in the week before the publication of the report


This is EXACTLY what Enron did when it's Electricity Manipulation, Turning off power grids to falsely inflate demand on other grids....

[Eric Fox]

tuj...let's hope that it doesn't come down to violence and the issue can be settled through negotiations.