Oil breaks as the market shakes as the reality of tight supplies in a post Fed meeting world comes to light. The dollar rebounded and commodity markets broke when the market realized that while the Fed was still supplying stimulus but it would not go on forever. With petroleum still wobbly after getting hit with this week's bearish supply report, the bears have gained control over the market. Technically the bears' biggest fear is profit taking or an economic or geo-political event that could once again change the current landscape. Let us hope that it is not going to be Iran.
The New York Times is reporting today that the United States, along with the leaders of Britain and France, will accuse Iran Friday morning of building a secret underground plant to manufacture nuclear fuel and charging that Iran has hidden the covert facility for years from international weapons inspectors. Iran's quest to build nuclear weapons is now out in the open and after a scathing attack on the UN and its failure to contain Iran by Israeli Prime Minister Benjamin Netanyahu, the market has concern. Netanyahu expressed outrage at the UN for giving Ahamadineajad, the denier of the Holocaust and the winner of an election stolen by murder and intimidation, legitimacy when they gave him a forum to speak while his country Iran was lying to the world and seeking nuclear weapons. Now the US, Britain and France will accuse Iran of lying to everyone in the world and we wonder if sanctions will be far behind.
Obama has set the stage for a new round of sanctions against Iran. By dropping plans for a missile shield in Europe, the Russian's have grudgingly opened up the possibility of going along with a new round of sanctions. Russian President Dimity Medvedev expressed doubts they would work and seemed to suggest that if indeed the rest of the world goes along with sanctions, they would agree and not stand in the way. Of course Russia stands to gain financially as they would be able to pick up some of Iran's oil export revenue.
The most likely sanction against Iran would be a cut off of gasoline imports. Iran sits on top of tons of oil but they do not have the refinery capacity to produce enough gasoline to meet their own needs. The problem with that is China may circumvent global sanctions by selling gasoline to Iran anyway.
What will this mean to oil prices? Well if this had happened 3 years ago, oil might have run up $10.00 a barrel or more. Yet now the impact will be much less as a world awash in oil and spare production capacity can more than make up any loss of Iranian supply. Still traders have to beware if this evolves into a military conflict because Iran sits on the straits of Hormuz where 20% of the world's oil flows through on a daily basis. Iran has threatened to shut down the straights if attacked yet many doubt their ability to do so. Still the risk of a conflict in that area would indeed pump up the risk premium for oil around the globe.
Republished with permission from Alaron's Energy Report Daily.