Saturday, June 28, 2008

Amadinejhad -- A Squealing Pig

Wednesday through Friday, Iran squealed like a stuck pig. Last weekend, a European leader said Europe would discuss additional sanctions on Tuesday. On Monday the big news was all about banking sanctions imposed by Europe. This was month old news but it was presented as if it had just happened. I did not see or hear much more about the Tuesday meetings, except a few mentions that European leaders might block oil imports from Iran.

Wednesday, Iran said harsh sanctions would cause them to stiffen their resistance to nuclear negotiations. By Thursday, the head of OPEC was telling that the price of oil would go to $170 during the month of July (the market discounted that risk on Thursday). When Libya joined the fray, threatening to cut off its shipments, the OPEC leader said that the price of oil could go to $200, $300 or $400 per barrel if the oil flow from Iran was cut off. The oil price moved up another .57 on Friday, making it clear that even the wildest bulls do not believed the $200 figure.

The traders who sold oil short early in the week were on the run by the end of the week. The short sellers had noted the drop off in use in such places such as South Korea and the USA. Sellers were also aware of a sharp drop in purchases by China. While the traders for Goldman and other "big boys" are well aware of the facts, the news that China has filled up a new, large, storage facility is still not widely known. It has been estimated that sales from North Africa to China were 500,000 barrels per day higher than normal during the past 3 or 4 months while these storage tanks were being filled.

If one adds up all the new oil coming on line to the decline in consumption that has already occurred (Ed Wallace made a partial listing in Business Week) the total is more than enough to replace all of Iran's production. If Libya and Venezuela were to also shut down, forcing Bush to use up to 4.3 million barrels per day from the SPR, Bush would win accolades for having built up the reserves and, as is usually the case, the market would surprise the world and quickly turn down as it would suddenly be clear that the world can outlast the renegades. .

The way to view the price of oil is to think of it as a weighted average of what investors believe is going to happen. If a large speculator believes oil will be at $100 in three months, he will sell short. If he suddenly comes to the realization that Iranian oil might be cut off, he might change his expectation to $150. Under the circumstances, he would "buy-in" his short contract and buy a long contract. If he is on the very high margin allowed on the futures market, he might buy 10 times more oil than he has money, twice!

This is the type of change that happened late this week. There was a huge move that baffled the pundits who decided the price must have risen because Ben Bernanke spoke like a "wimp" in regard to higher interest rates. Others decided that demand from China and India is still driving up the price, even though each of these countries have just taken extraordinary steps to curtail their consumption. The price can go to relatively short term extremes due to speculation but the price must come back into the range supported by total physical demand plus spare storage capacity. I doubt if there is much spare storage capacity left and physical demand is falling around the world. Japan has decreased demand to such an extent that they are now an oil products exporter!

The problem the traders will discover with this weeks big change is that the risk of bombing Iran is not nearly has high as is perceived. Bush does not want war with Iran. Also, the risk of a cut off of oil by Libya or Venezuela is not nearly as high as believed. Neither Libya nor Venezuela want to cut off the sale of oil. The leaders speak words to show their support for Iran but they also need as much revenues as they can get.

Iran is squealing because the leadership is facing the likelihood of more domestic riots. Last summer, there were riots when gasoline was rationed, riots when rice was not available and since that time there have been al-Qaeda style explosions. An Iranian Mosque was hit a few weeks ago. The political opposition to Amadinejhad is speaking out. The bottom line is that time is running out. Amadinejhad needs to make his deal soon or he will be kicked out of office. Polls in Iran show that the majority blames the Iranian government, not the sanctions, for the economic problems. This is partly the case because Amadinejhad made the mistake of shutting down opposition media. The story, in the Iranian press, about the oil stored in ships, is that oil is being stored while waiting for refineries to complete their maintenance. He cannot keep telling that lie much longer.

The other day, you asked me why Bush is not more open about what he is trying to accomplish. I should have answered in terms of football coaching strategy. Neither the offensive coach or the defensive coach is going to share his play book with the other team or even with home side spectators. Each coach has a plan laid out for the whole game but he may have to alter that plan depending on how the game goes. In a good game, both the offense and the defense will pull off a couple of stunts or trick plays. At just the right time, there will be a hitch to a wide receivers familiar route that causes the defender to make a step in the wrong direction. At just the right moment, a line backer will blitz.

Bush has timed his big moves for a fourth quarter win. His team has played a very complex and even a brilliant game. He will win in Iraq just a few months before the elections. He will announce the returning home of a substantial number of troops before the elections. Iraq will hold elections just before the US elections. The odds are in his favor that deals will be signed with India, Iran and Syria before the elections.

You may have seen the article in which the NY Times begrudgingly gave Bush credit for pulling off the "impossible" in North Korea. If he pulls off the proposed agreements with Syria, Lebanon, India and Iran, ninety-eight percent of Americans will be totally surprised.

I keep thinking of Amadinejhad as a trapped animal. Many people say that a trapped animal is a dangerous animal but that is not true, if his cage is locked tight. An animal in a tight cage may growl and howl a lot, it may foam even foam at the mouth but Amadinejhad is surrounded. There is only one way out.

My real concern is how much more time until the drop dead date? If an agreement is not going to be reached, Bush will need to change strategies. Bush has sternly said that he will have his deal signed in Iraq within the month of July. He will attend the Olympics that start on August 8 and end on August 24. The democratic convention is in late August and the republican convention runs from September 1 to the 4th. Bush surely has this whole process timed to give a month for the success to sink in before the convention. Perhaps he will have to leave the Olympics to sign the completed deal.

With or without a deal in Iran, the 123 deals will need to be pushed through congress. It is my opinion that there will be fussing and cussing but in the end, many more than 50% will vote yes. This is not one of those deals that the leadership can lock up in a committee or that 40 senators can block. It is my expectation that these votes will be cast about the time that troops are headed home.