A Special Report on Oil by Ronald Stoeferle
Our good friend Ronald Stoeferle of Erste Bank, who has penned the justly famous 'In Gold We Trust' reports, has just published his latest special report on oil, which readers can download here: 'Nothing to Spare' (pdf).
This is a very comprehensive report that looks at every nook and cranny of the crude oil market – including the debate over resource depletion versus human ingenuity which we have briefly discussed last week. We recommend it highly.
As we have noted in our market observations post, the current speculative positioning in energy futures has become more extreme over the past several weeks, this is to say, speculators now hold very large net long positions in crude oil and gasoline futures. This suggests a near term pullback is likely, with the caveat that the confrontation with Iran continues to weigh on the market and creates a considerable amount of uncertainty.
A Few Words on Iran
Political conservatives allied with Ayatollah Khamenei have just won big in Iran's elections, taking about 75% of the seats in the Majlis (parliament).
This is widely seen as a setback to Iran's president Ahmedinejad, although opinions differ on how big the damage to him and his political allies actually is. Note here that while Ahmedinejad used to be allied with Khamenei's faction in the last election, this is no longer the case. Although two prominent opposition leaders were barred from taking part in the election (Mirhossein Mousavi and Mehdi Karoubi, who ran for president in 2009 are these days under house arrest), the turnout was quite strong at over 64% versus the 2008 parliamentary election at 57% (note that most Western democracies can only dream of voter turnouts this high).
We interpret the election result not merely as a rebuke to Ahmedinejad, who has lost a significant amount of support as Iran's economy suffers under sanctions and experiences extremely high inflation, but also as a typical 'circling of the wagons'. Voters have not abandoned the clerical regime – on the contrary, support for it has increased. This is precisely what one would expect with the country high up on the list of declared Western enemies these days. Only in the fantasy world of the neo-conservatives do regimes suffer a decline in popular support when their country is attacked, even if the regime in question would quite likely have problems keeping popular support intact otherwise.
In the meantime, North Korea has evidently once again won major diplomatic concessions by dint of having left the nuclear non-proliferation treaty and becoming a nuclear power. The incentive for Iran to obtain nuclear arms couldn't be more obvious. According to a rumor in the German press over the weekend, two of North Korea's nuclear tests were allegedly done on Iran's behalf – the implication being that Iran possesses nuclear weapons already.
Although nuclear weapons technology is now about seven decades old and any halfway economically developed nation should be capable of building such weapons if it so desires, there is one major reason to disbelieve this report: If Iran had nuclear weapons already, it would have said so, or at least allowed it to become an 'open secret' similar to Israel's nuclear armament.
There is normally no point in keeping such information secret, as the deterrent effect can only work if your enemies or potential enemies believe you do possess nuclear weapons. A good example illustrating this is actually Saddam Hussein – although he didn't have a shred of WMD left, his regime was always ambiguous to some degree about this fact. The reason was that he couldn't be sure if it was better to admit that his arms were nothing but scrap or leave his enemies believing he could actually do them harm. So we continue to hold with the current 'official' assessment that Iran has no nuclear weapon at this point in time.
Many people are probably wondering why Iran seems to be following a similar course. To this it is necessary to try to look at the situation through the eyes of Iran's leadership. For many years the possibility of a military attack on Iran has been discussed favorably in the United States and Israel. The sanctions recently imposed are in fact akin to an act of war already. The example of North Korea must be strongly underscoring the idea that a possessing a nuclear deterrent would be the best way out. Note here that occasional attempts by the Iranian government to achieve a negotiated settlement were brushed away in the past (the routine reaction to such attempts at rapprochement is that they are not credible – it's damned if you do and damned if you don't). It should be noted that Iran's government is not monolithic either – it has its share of 'hawks' and doves', but the hawks surely haven the upper hand now following the election.
In order to better understand Iran, one must also consider its history. Throughout the 19th and 20th century, the country has been a 'plaything' of the big powers. First the British and Russians, and later the US. For a long time, Iranians regarded the US as being 'above politics' – e.g. in 1907 a US envoy (William Morgan Shuster) attempted to help Iran getting its tax policies in order. He was ultimately pushed out from his post again through British and Russian influence.
The benign view Iranians had of the US changed dramatically with the CIA organized coup that deposed prime minister Mossadegh in 1954 and led to the return of the Shah from exile. The Shah was – rightly – regarded as a US and Israeli puppet and he ruled the country with an iron fist through his secret police, the SAVAK. Today's leader of Iraq's ulama (the clerical establishment), the ayatollah Ali Khamenei, was once imprisoned and tortured by the SAVAK. Not surprisingly, he has little love for those who made this possible.
In order to understand how it was possible for a theocracy to take political power in Iran, one must be aware that there was always a kind of division of power between the worldly and clerical establishment in Iran since Shi'ism was introduced on a broad front in the 13th century. The ulama had its own prerogatives, among which was the provision and interpretation of law and social services. When various shahs began to 'sell out' Iran to foreign powers in the 19th century, the worldly and clerical authorities had their first clashes. A revolution against the Shah Mozaffar-ed-Din took place in 1905 – 1906, led by clerics, merchants and intellectuals. While this – comparatively peaceful – revolution proved ultimately unsuccessful, it paved the way for the more violent and successful revolution in 1979. The common people were arrayed with the clerical establishment against the shah even back in 1905. A point we wish to make here is that the fact that clerics have political power is far less unusual from the point of view of Iranians than it appears to Westerners.
Be that as it may, a confrontation is now underway. The most recent sanctions aimed at crippling Iran's oil exports probably won't have as much effect on the global supply situation as one might expect, as oil is fungible and Iran will probably end up selling most of its oil to China, which isn't taking part in the boycott. Nevertheless, there will likely be a degree of short term disruption. Should the confrontation deteriorate into a military attack, then much greater disruption can be expected for the oil markets.
As Ronnie's report makes clear, there is very little spare capacity. No-one can really make up for Iranian supplies beyond the very short term. Moreover, a military confrontation could see oil installations sabotaged elsewhere and Iran could very likely disrupt shipping through the Persian Gulf.
Iran's clerical leader, the ayatollah Ali Khamenei. No love lost for the former supporters of the Shah.
(Photo credit: DPA)
Dear readers, we are greatly honored by your readership and sincerely hope that our special mixture of entertainment and education continues to add a little value to your lives. As you can probably guess, our blog is not really a giant commercial enterprise, for that its readership is too exclusive and small. Nevertheless, running it involves not only time and effort, but also monetary costs. We are therefore starting another fundraising drive. You can help us reach our funding goal by either donating directly via Paypal or via Bitcoin.
Thank you for your support!Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
One Response to “Crude Oil – Nothing to Spare”
Most read in the last 20 days:
- The Stock Market in Trouble - How Bad Can it Get?
A Look at the Broader Market's Internals We have previously discussed the stock market's deteriorating internals, and in light of recent market weakness want to take a brief look at the broader market in the form if the NYSE Index (NYA). First it has to be noted that a majority of the stocks in the NYA are already in bearish trends. The chart below shows the NYA and the percentage of stocks above their 200 day and 50 day moving averages, which is 39.16% and 33.77% respectively. When...
- Gold Stocks: A Playable Rally May Be Beginning as Junk Bonds Crater
Gold Stocks Jump and Retrace 50% Last week we discussed the potential for a rally in the gold sector (see: “Gold Stocks at an Interesting Juncture” for details). Gold stocks jumped early in the week and then retraced almost precisely 50% of the initial move higher, in the process closing a gap that was left behind on Wednesday. Image credit: dreamstime.com Interestingly, for the first time in many months, there were three up days in a row prior to the...
- A new Multi-Year High in Buying by Gold Sector Insiders
Latest Data from INK Show A Huge Surge in Insider Buying As our friends at INK Research in Canada have pointed out to us, insiders at gold companies have made use of the recent sell-off in the sector to load up on shares to an extent not seen in many years. Image source: bidness etc The INK insider buy/sell indicator for gold stocks has peaked just one day after China's initial devaluation announcement at nearly 1,200%: INK's gold insider sentiment...
- Is Crude Oil Close to a Low?
Panicky Headlines Everybody knows that there is a never-ending glut in crude oil, right? Who knew about it a year ago? Not everybody, that much is certain. The problem with what everybody knows is of course that it is often not worth knowing. Photo credit: Alamy Today a friend pointed two articles out to us that have been published yesterday and today. Their headlines say it all. The Wall Street Journal writes “No End in Sight for Oil Glut” - and proceeds to...
- The Stock Market's Panic Potential
The Odds Favor a “Warning Shot” Scenario - but there is a “But” As regular readers have probably noticed, we have upped the frequency of our “caution is advised” posts on the stock market in recent weeks in light of the market's increasingly deteriorating internals. Although one never knows when exactly such warning signs may begin to matter, it is always a good bet that they eventually will. Last week the market delivered a little wake-up call to the hitherto rather...
- The Donald and China, or The Fallacy of Protectionism
Not Every Populist Topic is Worth Exploiting For reasons that will forever remain a mystery to us, mercantilism and protectionism actually hold enormous popular appeal. The best explanation we can come up with for this phenomenon is that the support for such policies is based on a mixture of economic ignorance and relentless propaganda by vested interests over the past, say, four centuries. Still, it is almost comical that people are so vociferously clamoring for policies that can actually...
- Real Wealth and Phantom Wealth – Secular Boom and Bust
The Things that Produce Real Wealth vs. Phantom Wealth Our friend Michael Pollaro, the keeper of long-term data on the true money supply and author at Forbes as well as occasionally a guest author on this site, recently sent us the following chart of a relationship he keeps a close eye on. It depicts the annual change rate in new orders for non-defense capital goods and compares this series to the Wilshire total market index. Photo via...
- The Economy is in Liquidation Mode
Capital Consumption If you’re an American over a certain age, you remember roller skating rinks (I have no idea if it caught on in other countries). This industry boomed in the 1970’s disco era. However, by the mid 1980’s, the fad was fading. Imagine running a rink company at the end of the craze. You know it is not going to survive for long. How do you operate your business? The birthplace of roller disco turned out to be edible, sort of Photo via...
- Jackson Hole – Meeting of the Physics Envy Brigade
Planners Meet to Discuss the Impossible The Jackson Hole pow-wow takes place this weekend. A more revolting get-together of actual and armchair central planners (i.e., the advisors to the planners, many of whom see themselves as planners-in-waiting) could hardly be imagined. One has to wonder how much more damage they will be allowed to inflict before someone finally says “enough!”. The parlous state of the global economy and the series of booms and busts we have experienced over the...
- The Stock Market After the Mini Crash
A Post Mortem – the Influence of Black Box Systems Here is a brief update on the recent market action and what we think one should watch out for now. First of all, we already noted in our last market update that something about the recent “mini crash” was quite unusual. For one thing, it started to get serious in an options expiration week, which happens only rarely. One rather scary precedent is actually the 1987 crash: on that occasion the market declined sharply during expiration...