Deck The Barrels!
Deck the halls with barrels of oil fa, la, la, la, la, la, la, la, la. 'Tis the season for embargoes fa, la, la, la, la, la, la, la, la. Then we look to a Europe bail out fa, la, la, la, la, la, la, la, la. Forget that rising Saudi production, fa, la, la, la, la, la, la, la, la.
Now you know why we have been singing, “I'll be long for Christmas" and "you better not pout and you better not cry, you better be long I’m telling you why." It is because the bullish stars are all coming into alignment. Once again the oil market looks to end another year with a bang as the reasons to be long keep piling up.
First there is the backdrop of the most serious tensions with Iran that we have seen in many years. Iran’s storming of the British Embassy failed to win any sympathy from other members of Europe and they are still considering an oil embargo. At first it looked like Europe thought the Idea of an Iranian oil embargo might harm them more than the Iranians and the trade thought the idea was off the table. Well they can’t think that anymore after Bloomberg News reported that European Union Energy Commissioner Guenther Oettinger said he thinks there is a consensus in the bloc to ban Iranian oil imports. The EU should agree on the ban and then bring in other countries such as Russia and the U.S. He didn’t specify when the EU would implement a ban.” My bet is after winter. Iran of course is warning of dire consequences if Europe chooses not to buy their politically tainted oil. They are predicting that oil could soar to $250 a barrel if the embargo is in force, showing that the Iranian leadership is as delusional as ever.
Of course the Russia, who is the Iranian’s bad behavior enabler, say it will not go along with an embargo. Reuters News reports that, “Banning Iranian oil sales would be a political move and Russia does not believe energy supplies should be used to exert pressure.” Russia's energy minister Sergei Shmatko said, "It is quite obvious that this decision is based on some political motivation ... In these situations we try to be as neutral as possible." He is right; the political motivation is Iran’s contempt for international law, the sanctity of foreign embassies and their total disregard for human rights.
The rising Iranian risk is offsetting the exciting news that Saudi Arabia is pumping the most oil they have in many years, coming in at around 10 million barrels of oil per day! Take that peak freaks. Bloomberg News said, "Ali al-Naimi said in an interview in Durban, South Africa, that this month if needed, the country’s oil minister said that the country produced 10 million and 40 barrels in November because according to Al-Naimi that’s what the customers wanted." Of course it is not what the other OPEC members wanted and could add to tension at the next OPEC meeting. Assuming there could be more tension after it was revealed that the Iranian government tried to plot to kill the Saudi ambassador to the US. Just one big happy OPEC family!
Oil of course went on another wild ride after S&P decided that the downgrade warning of most of Europe wasn’t enough to shake up the markets. They forgot to mention, like oh by the way, we could lower the long-term credit rating on EFSF by one or two notches if we were to lower the "AAA" sovereign ratings of any Eurozone country that is currently on CreditWatch, or one or more of EFSF’s guarantor members. In other words the European Financial Stability Facility may lose its top credit rating if any of its guarantors have their own debt grade lowered, Standard & Poor’s said. That might have been nice to know yesterday.
Yet despite the S&P warnings the market is gaining optimism that Europe is getting its bailout act together. The Financial Times is reporting, “Eleventh-hour negotiations have begun to create a much bigger financial “bazooka” to present at this week’s European Union summit that could include running two separate rescue funds and winning increased support for the International Monetary Fund. This three-pronged rescue system would form part of a carefully crafted package EU leaders hope will win over financial markets, just two months after a similar summit failed to convince bond investors Europe could contain its spiraling debt crisis. The rescue system would be introduced alongside proposals to rewrite EU treaties with far tougher budget rules for the Eurozone. According to senior European officials, negotiators are considering allowing the Eurozone’s existing €440bn bail-out fund to continue running when a new €500bn facility comes into force in mid-2012, almost doubling the firepower of the bloc’s financial rescue system. The proposal, being debated by “sherpas” ahead of Thursday’s crucial Eurozone summit, could also include speeding up cash payments into the new €500bn fund – known as the European Stability Mechanism (ESM) – to give it more heft and improve its creditworthiness in the eyes of credit rating agencies.”
T’is the season for falling oil stocks! The API reported a big drop in crude supply, reporting a fall of 5.04 million barrels. Like I said before, the end of year drops in supply are expected as yearend tax considerations take hold. Distillate inventories increased by 1.68 million barrels and gasoline supplies surged 5.97 million barrels. Gasoline prices fall and demand comes back. Barbara Powell art Bloomberg News reports that, "U.S. gasoline demand rose 1 percent last week to a 14-week high as driver refilled their tanks after the Thanksgiving holiday weekend, according to MasterCard Inc. Drivers bought 9.06 million gallons a day of gasoline in the week ended Dec. 2, up from 8.97 million the week before, according to MasterCard Inc.’s SpendingPulse report. That’s the highest level since Aug. 26 and follows a 3 percent gain during the prior week. Fuel use fell below a year earlier for the 14th consecutive time last week, down 4 percent from 2010 levels. Fuel demand over the previous four weeks was 4.2 percent below a year earlier, the 37th consecutive decline in that measure. “While the post-Thanksgiving week produced week-over-week gains similar to ones we had seen last year, given the overall depressed levels of gasoline demand, we continue to observe declines in year-over-year terms,” John Gamel, a gasoline analyst and director of economic analysis for Spending Pulse, said in the report.
Thanksgiving was on Nov. 24 this year and the holiday period extended through Nov. 27. Gasoline consumption in 2011 through Dec. 2 is down 1.5 percent from a year earlier, a wider gap than the prior week’s1.4 percent difference, according to the second-biggest payments network company. The average pump price fell 4 cents to $3.30 a gallon, the lowest level since Feb. 25. Prices were 15 percent higher than a year earlier. Gasoline demand peaked this year at 9.56 million barrels a day in the week ended July 1 as motorists filled their tanks before the July 4 holiday weekend. The lowest level of consumption came in the week ended Feb. 11 when consumers bought 8.47 million barrels a day."
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at firstname.lastname@example.org.