Oil a Conjecture

Andy note: This was originally written by Yra Harris on March 2012 on his blog.

Before I take a few days hiatus (well deserved) and with the world in a more “serene” state, it is a good time to contemplate the recent news out of the GULF REGION. In a story in yesterday’s Financial Times, "Saudis battle to calm oil fears,” it seems that the Saudis have consigned 11 VLCCS to send a total of TWENTY-TWO MILLION BARRELS of crude to the U.S. This is an interesting development as high U.S. gas prices are seen to be an issue in the upcoming presidential election.

NOTES FROM UNDERGROUND tries to analyze the impact of political decisions on the economy and vice versa. Sifting through the news to find nuggets that can result in profitable trades. THE FOLLOWING IS CONJECTURE: Why is the U.S. suddenly making a large deal for Saudi OIL? A possible explanation may be that the OBAMA ADMINISTRATION wants to impact summer driving prices and do so without the acrimony that will come from releasing supplies from the STRATEGIC PETROLEUM RESERVES.

The media buzzes everyday with the probability of an Israeli attack on Iran, which purportedly keeps a “risk bid” to the crude as nobody wants to be short crude in case the Iranians close the STRAITS OF HORMUZ. While the Israelis are the headline it seems that the SAUDIS are always missing from the story. For all the years I have studied the GULF OIL situation it has been the Saudis who are very fearful of Iranian designs for the GULF REGION. Even during the Shah’s reign there were fears of an Iranian design on the huge oil reserves of the GULF. The Saudis financed the Iraqis during the Iran-Iraq war of the 1980s to insure against either side becoming too dominant.

While the Israelis are certainly concerned about an Iranian NUCLEAR WAR CAPABILITY, the SAUDIS may be even more fearful. A nuclear Iran throws the entire SUNNI GULF ARAB states into an arms race as the GULF KINGDOMS search for a deterrent. Not only is OIL a key but the desire for control of the ISLAMIC HOLY SITES of MECCA AND MEDINA are an added bonus. While the Israelis grab the headlines did the White House make a deal with the Saudis and promise to remove the Iranian NUCLEAR CAPABILITY after the election????

Again, conjecture, but this concept works on so many different levels. It is not the first time that a President has played domestic politics with OIL or other commodities. Nixon with the China card and cotton; George H.W. Bush and the oil prices in 1986; Reagan and Iran-contra … U.S. PRESIDENTIAL POLITICS is ladened with international intrigue for domestic political advantage. LOWER OIL PRICES WILL AID CONSUMER DEMAND AND EVEN PREVENT INFLATIONARY FEARS FROM DRIVING THE FED INTO ACTION (HA HA).

Also, the heavily stressed EUROPEANS could use some relief from the drag of rising oil prices. It is the Saudis that have the ability to ramp up production quickly to expedite the impact of summer energy prices. NATURAL GAS PRICES WERE President Obama’s winter gift. Will SAUDI CRUDE be the summer present? Again, just thinking outside the BOX and looking to understand the GLOBAL MACRO LANDSCAPE.

***Quick Hitter: It was ANNOUNCED TODAY THAT THE EUREX EXCHANGE IS GOING TO LIST A FRENCH BOND FUTURES CONTRACT, WHICH WILL PROVIDE AN ALTERNATIVE TO THE ITALIAN BTP and THE GERMAN BUND. This will be an important development and will relieve the pressure as CDS and BANK SHORT SELLING will not be the sole hedges for covering peripheral sovereign debt risk. Will we see a SPANISH BOND FUTURES to help mitigate Spanish sovereign risk? So much to consider as we head into the throes of the political season.

***In Chairman Bernanke’s testimony before the Committee on Government Oversight and Reform, the emphasis was on the continuing problems in Europe. While the Chairman noted improvements in the current crisis, the view from the FED was that there were still many problems plaguing the nations of Europe and the crisis was far from over. Mr. Bernanke noted that the U.S. banks had very little exposure to the peripheries and carried some CDS risk, the U.S. financial system has large exposure to the “core” countries.

It is no small matter that the Fed Chairman says there is large exposure to the big European banks in the CORE for in a solvency situation the core will be greatly stressed and with it the U.S. money centric banks. The overall tone of the testimony was that the FED CHIEF will err on the side of caution as he maintains his credentials as a fundamentalist of the 1937 analysis. Better to be sure that the recovery has genuine traction.