Monday, March 7, 2011

Oil, Pro’s and Con’s (the Pro’s Win)

Oil, Pro’s and Con’s (the Pro’s Win)

March 6th, 2011
David Goldman's Hallucinations and DEBKA's disinformation...., just like Stratfor's/CIA utter disinformation galore.....

I’m holding my position in oil futures, but notched my stop losses in line with Friday’s price spike. The Obama administration is trying to jaw prices down by threatening to release oil from the strategic reserve. One never knows how markets will react. But I see the crisis getting worse. The most important news last week regarding Egypt was that the military junta will not–despite earlier promises–re-open the natural gas pipeline to Israel. One story is that it was not damaged by sabotage (as earlier reported) but that the junta is somehow afraid that it would be damaged. That doesn’t quite make sense. I’ve heard this from senior Israeli officials, but don’t know what to make of it. The story at the Israeli spook site Debka makes more sense:

The prospects of Egypt resuming its gas supplies to Israel dropped to zero Thursday, March 3 when Egypt’s state security prosecutor Abdel Magid Mahmud announced that deposed president Hosni Mubarak would be summoned for questioning next week about allegedly corrupt deals for selling Israel Egyptian gas at knock-down prices, DEBKAfile’s Cairo sources report. Mahmud claimed he had documentary evidence that Egypt lost more than half a billion dollars on its gas sales to Israel and sought to follow up suspicions that the difference was shared out between the Mubarak family and the Israeli and American partners in the transaction.
The flow of gas to Israel was suspended on Feb. 5 when Hamas blew up the pipeline running through Sinai during the Egyptian uprising. Our sources confirm that supplies will not be renewed until the end of the corruption inquiry which could go on for years.

Debka is hardly a reliable source, but something is very wrong here. Egypt needs about $54 billion a year in foreign exchange at 2010 prices to cover its import bill. It stands to lose about $13 billion in tourism, $2 billion due to expulsion of Egyptian workers from Libya who send remittances home, and another $2 billion from the natural gas exports to Israel. That’s nearly a third of its foreign exchange budget. And the rise in food prices probably adds another $3 billion or so to the bill. Egypt’s market remains shut. How these numbers are supposed to add up is past my ability to reckon with available information. The country could go into a tailspin.

Egypt doesn’t seem susceptible to stabilization. Israeli sources say that the Muslim Brotherhood is so convinced that the situation will fall apart that it doesn’t want to be in charge for the time being and take the blame for the chaos–which makes a good deal of sense. Libya remains in civil war. The Bahreini Shi’ites today barricaded the prime minister inside his office. Yemen is not in control.

The big question, of course, remains Saudi Arabia. Again, the unreliable Debka says that Tehran is stirring up Saudi Shi’ites (who happen to form a majority in the kingdom’s southern oil-producing region, right across the Persian Gulf from Iran).

Ahead of the first Day of Anger planned in Saudi Arabia for March 11, a senior Iranian figure close to Iranian President Mahmoud Ahmadinejad warned Riyadh Wednesday, March 2, against launching preventive security measures against, or cracking down on, the kingdom’s two million Shiites who live and work in the oil regions of the east.

The world’s biggest oil exporter, Saudi Arabia covers 40 percent of the world’s oil needs.

Saudi and other Gulf security sources called the Iranian warning unprecedented interference in the domestic affairs of Saudi Arabia and a call to the Shiite minority to rise up against the throne under the shield of Iran’s protection. It also struck the match for reigniting Shiite riots in Bahrain, fomenting the Shiite minorities in other Gulf emirates and further complicating the explosive situation in Yemen.
In Washington, Secretary of State Hillary Clinton came forward for the first time in the three-month wave of Arab uprisings to accuse Iran of using its Lebanese surrogate Hizballah to shape events in the Arab world. Addressing the Senate Budget Committee Wednesday, March 2, she said “They are doing everything they can to influence the outcomes in these places,” she said, citing Egypt, Bahrain, Yemen and the Palestinians, though not Saudi Arabia. “They are using Hizballah to communicate with counterparts. … in (the Palestinian movement) Hamas who then in turn communicate with counterparts in Egypt.”

Something is up–but how serious? Saudi Arabia detained and then released a Shi’ite cleric after protests. The Daily Telegraph reports today that twenty-two Shi’ites have been detained. Background on the Shi’ite problem in Saudi Arabia can be found in an older report from the Crisis Group (very lefty and sympathetic to Hamas and other malefactors).

The argument (per the New York Times) for sales from the reserve is simple:

The loss of more than a million barrels of sweet crude on world markets resulting from the turbulence in Libya is tightening supplies for European refineries that need high-quality oil to produce diesel fuel, which is popular in Europe.

By releasing sweet, or low-sulfur, crude oil from the reserve, Washington might relieve a bidding competition between American and European refiners for sweet crudes produced by Algeria and Nigeria, two producers that are straining to fill the gap left by Libya.

I would not be surprised if the US (and other governments) tried to whack oil prices down next week. My strategy: take the stop losses if they hit and refill positions at better levels. The scale of the prospective problem is simply out of the range of government intervention.

Even if the Saudi situation is dried out (and Saudi security is fearsome), the bigger danger lies on Israel’s northern border, where Hizbollah has some 50,000 rockets stockpiled, many hidden under homes and hospitals. Most of these rockets are long range and accurate, which means that Hizbollah could hit Israel’s air force bases, oil refineries, airports, and of course population centers. If Iran decides to make its play and let some of these devices fly, the Israelis will have no choice but to respond massively and quickly, which means very large numbers of civilian casualties. That’s all in the plan; Hizbollah is hoping that by staging supposed Israeli “war crimes” it can force an international “solution” to the regional conflict at Israel’s expense. This has been the plan all along. What the probably of this scenario might be, I don’t know, and neither does anyone else. But the distribution has a tail like a Stegosaurus, so that the price of hedges against this kind of tail risk ought to be elevated....