WHY IS OIL DOWN $3?

The complete question asked, "Why is the price of oil down $3 after the announcement of the biggest weekly decline in oil inventories in 4 years?"

The answer could be one of the following.


1) To maintain maximum pressure on Iran, the US is sacrificing inventories to make sure other nations are well supplied without buying oil from Iran. The US has the option to tap our SPR if needed.

2) Seeing the "tipping point turn" in world wide demand, buyers are refusing to buy at today's price. A corollary being that the "battle with Iran" seems to have been won.

3) The back up in oil going to tankers in Iran, which started around May 5, has finally reached the US. It is Iran that is holding back production.

While there is a partial truth in number 3, my vote is for number 2. In 1980, a similar scenario played out. Oil was sitting in tankers being stored on the speculation that prices would continue to rise. Suddenly there was a "buyers strike", prices fell and there was a rush to unload tankers. The energy czar under Jimmy Carter stated that deregulating oil prices in the US would cause gasoline to soar to $10 per gallon. Reagan deregulated and the price fell. Some politicians become so caught up in "winning" that they suspend belief in basic laws of economics The pressure on the US congress to permit drilling for US oil is growing. The average representative and even the average person understands that an increase in supply should lower the price.

Today it was reported that officials in India have said they no longer desire to buy Iranian oil. Oh the pain! For months, Iran wooed India. India, Pakistan and Iran have been working on a $7.5 billion dollar gas pipeline. The status of the IPI pipeline is not clear but we know that on April 24th a deal was make for a gas pipeline to run from gas rich Turkmenistan through Afghanistan and Pakistan to Iran. This TAPI gas line will also cost about $7.5 billion dollars. The big difference between the two is that the promoters of the TAPI line have already arranged financing. It is likely that the Iranian line cannot get financing. Only last week, European banks threatened to freeze deposits held by an Iranian bank.

The TAPI line will not be finished until 2014 and the planned extension to China will take longer. The slow down in exports to the US is zapping the current demand in India and China. Supplies will be ample because there will be about 14 million barrels of new production started in 2008 and 2009. There is much more new production expected to start up from several countries from 2011-14. It could be coincidence but Iran stopped buying oil from Iran soon after the TAPI deal was signed and soon after Russia agreed to supply Iran with nuclear fuel.

I recall reading that the average American under 40 years of age does not know that Russia was a US ally during WWII. Many folk today cannot believe that Russia and China are working with the USA, Europe and Saudi Arabia to eliminate the threat of a nuclear armed Iran. The UN security resolutions, including three sets of sanctions against Iran were approved 15-0, 15-0 and 14-0-1. Russia, China, UK, France and USA all had the ability to veto the resolutions. Saudi Arabia is building a network of oil pipelines that will bypass the Straight of Hormuz. An agreement with Iran is a matter of time.

Aggressive investors in stocks should do well!