Don’t Be So Crude

by CC May 10, 2012 1:44 pm • Commentary

The big news yesterday in the world of oil was the announcement by the EIA on Crude oil stockpiles and inventories. First here’s stockpiles:

Gasoline inventories last week fell 2.6 million barrels, to their lowest level since November, the Energy Information Administration said in its closely watched survey of petroleum inventories. The EIA’s measure of gasoline demand, meanwhile, rose 2%.

Analysts surveyed by Dow Jones Newswires expected gasoline stocks to fall just 600,000 barrels.

Slightly more interesting for the longer term is this data:

Oil inventories, however, rose 3.7 million barrels. Analysts had expected a smaller build of 2 million barrels. Oil inventories remain at their highest level since 1990, amid still-weak demand and steadily rising production.

Meanwhile, inventories at the U.S. oil hub of Cushing, Okla., rose 1.1 million barrels to a record 44.1 million barrels, the EIA said.

All of this comes against a backdrop of a slowdown in Europe, possible slowdown in China and who knows what’s going on in the U.S. All of these factors have had an effect on oil prices as it’s seen quite a few down days recently. But it still is at pretty high levels close to 100 dollar a barrel.

One of the factors behind these seemingly high prices has been Iran. The situation of rising tensions over their nuclear program has put a floor on crude for quite some time with the specter of  a possible military strike by Israel or/and the U.S. Air Forces hitting Iran’s nuclear facilities.

Israel’s Benjamin Netanyahu  just went through some political maneuvering this past week that may have implications for their plan about Iran:

Once again Israel has caught the world off-guard, this time by announcing the creation of a new national unity government, which incorporates the leading opposition party and the centrist Kadima headed by its new leader, former Defense Minister Shaul Mofaz.

I’ve read alot of competing opinion pieces on the subject as to what this all means. Here’s FP again:

Kadima’s return to office — Ehud Olmert, Netanyahu’s predecessor, was Kadima’s leader, as was Prime Minister Ariel Sharon, the party’s founder — will certainly affect any decision by Israel to attack Iran. Mofaz, who was born in Tehran, is known to be opposed to a unilateral strike; as a former chief of staff, his opinion will carry some weight in the government’s security cabinet. On the other hand, should he become convinced that Israel has no other option but to strike the Iranian nuclear facilities, his support would solidify Netanyahu’s decision, both internally and externally.

So could go either way. The one thing I do think though, is that the talk of a military strike on Iran seems a bit overblown. I think this happens because there’s a natural imbalance of talk about “tensions” vs status quo in foreign policy circles and the press. One doesn’t get on TV or an Op-Ed in the Washington Post if they’re the one saying they don’t foresee miltary action any time soon. War with Iran headlines get pageviews. Here’s an example from Business Insider a few days ago:

I won’t even bother quoting the article as it’s, well, it’s over the top. The important point is this is the backdrop in a lot of ways for this sense that something military is imminent with Iran. It may not be.

The U.S. has made it clear with Israel that they want to wait for newly imposed sanctions to play out. Secretary of State Clinton is just returning from a trip to India where one of the topics was trying to get India to cooperate with sanctions. It may or may not have worked. But the point is I don’t see the U.S. changing course on this policy anytime soon, especially with an election looming this Fall. A military strike on Iran would have massive effects on the price of oil.

So the big question in all of this is what will Israel do? My guess is they stay put for now as well. If that’s the case, and with rising inventories and a possible slowing economy globally, there may be a play here.

Enis will be looking at possible trades in a subsequent post.