Be Wary of Rising Oil Prices - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 25 February 2012
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- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
Over the last few weeks, the oil price has climbed dramatically due to a potential supply squeeze. Crude oil has risen by over 10% in the last month, largely due to the sanctions on Iran that are having a negative impact on overall supply. In addition, stronger economic data, particularly in the US, are increasing the demand for oil.

At least, these are the reasons we are given to explain the rise in oil prices. But do these reasons stand up to the facts? In the last month, have we seen a drop in supply that would give us this large price rise? And is US demand rising at a pace that would warrant this large price increase?

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Let's start with Iran. The US and Europe have imposed sanctions on Iran so that Iran will not be able to export to them. Of course, that doesn't mean Iran can't export to anyone. In fact, Iran's biggest crude oil customers are India, China, and Japan.

The latest production numbers have shown that Iran's February output will be roughly equal to their January output. In addition, their output over the last six months has been unchanged. This fact is in clear contradiction to what we've heard about low Iranian supply affecting the price. Iran's production hasn't fallen, and the market hasn't felt a supply squeeze.

In fact, overall OPEC output is at its highest levels since late 2008. This is due to rising production in Libya following a fall last year, and sustained output by Saudi Arabia and the U.A.E.

How about the demand side? Could that be responsible for the rise in price? According to the International Energy Agency, global oil demand will climb less than previously expected in 2012, due to lower global growth. In addition, overall oil inventories have risen since the start of the year, indicating that supply has slightly outpaced demand.

From the fundamentals of the crude oil market, it is apparent that prices should not be rising significantly. If anything, they should remain stable or even fall. Given this knowledge, how can we interpret the recent rise in oil prices?

It is likely that the oil price has risen as many people expect Iranian crude supply to drop dramatically, and this has so far yet to occur. It may occur in the near future, and this could lead to price rises later on. In the meantime, it would be wise to lookout for a reversal in oil price rises, and be wary of the current rise in price. The most important number to watch will be the supply from Iran, and we will keep a close eye on this in the coming weeks.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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5 Responses to "Be Wary of Rising Oil Prices"

Naveen

Mar 1, 2012

couple things to add:
1) I see that the govt buying oil from Iran at the current prices for months to come even when the oil prices going to go further up. THis is due to Iran piling up on Oil from june onwards due to embargo. And thus india benefiting. Is this benefit really shown on the accounting books of the oil companies i really dont know...Another OIL SCAM?
2) A top PSU bank buying out a european bank will be in news shortly. This is an experiment China is willing to do to learn. For the short term its a good deal for the bank as it gets funding at 1% when china inflation is at 6 to 7% (shortly gonna be 7.5 to 8%). This can give some more cushion to stave off liquidation issues. This will work out too as the ECB would treat the takeover bank as same as the 799 banks. The moral is the transaction options with embargo nations increases for china on its oil purchases.

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Mario Braganza

Feb 26, 2012

The title is 'Bailing out Germany' and the contents of Assad's writeup is with regard to rising Crude price - I have missed the point here and will appreciate a link. Thanks a lot.

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R R Bhutra

Feb 26, 2012

oil prices are manipulated.Unless we start looking to demand supply instead of some bench marked prices we will suffer.
Similar will be case for gold & silver.Today gold & silver are very high in contest of India is because of $ conversion once our bench mark shifts $ will become cheap its intrinsic value is much less could be 1/5th of current price.To correct this will take years & those suggesting investment on present value may not be correct.Yes if you have money in $ & do not want to convert at present investment may be worth.

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ATULAYA SHARMA

Feb 26, 2012

Well my personal take is that it is in US' interest to keep the crude prices up as that will ensure the strength of the US$.
If they have to do that artificially as they currently are through the 'Iran' bogey, so be it.

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Naveen

Feb 26, 2012

If above story is true, i believe so, June onwards there can be a inventory pile up in Iran as the European countries are completely stop purchases and turn towards Russia and Saudi for All of its supply. Now, from here on, this needs a broader explanation. How an equilibium can be formed with other asian countries eying for more oil. For lack of space and quick explanation i would say the bottom line is that the existing supply may not suffice the current demand leave alone the future demand.
This oil pricing can be a new Norm.
Reasons:
1) Countries like USA, Europe, China India etc are not able to find alternatives for years for oil nor there is a political will to do so.
2) Countries supplying oil (african, Russia, Arab nations) have no political stability however in recent times there can be and is an uprise/ change in political climate these oil producing nations which was seen never before in the history.
3) Lack of transparency and thus understanding in oil consumption, production and also transactions data. Moreover, added to this even the US being at helm for energy in the world having trouble to gauge its risk on depending on oil from countries like libya and other african countries.

Solution:
1) Get ready, learn to be in the new norm.
2) Look out for political shift (than the technical like production data etc..which i agree till now where the way it was done to predict prices), which normally takes half a decade or so to understand.
3) understanding globally the transactions which take place strategically on such large oil supply (currency, commodities, contractual agreements etc.)Ex: India buying oil from iran and money transaction via UCO bank, Calcutta to a turkey bank. iran increasing its diff asset bases out of Iran in turkey etc..


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