Iran Calls For $100 Oil, Total CEO Warns of Risk

Jim Brown
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Iran has never a country where its leaders were allergic to the TV cameras and reporter microphones. They are out winning friends again this weekend with their views on oil prices. Iran's oil minister is the acting president of OPEC for 2011. The position rotates among OPEC countries and this is the first time in 36 years that Iran holds the leadership position. Massoud Mirkazemi joined Libya and Venezuela in talking up crude prices this weekend.

The oil minister said he could see no harm in $100 oil. "None of the OPEC members find $100 oil concerning or irrational. Some of the OPEC members see no need for an emergency meeting even with prices rising to $110 or $120. None of the members have asked for an emergency meeting and I think for a long time there would be no such request." As the holder of the presidency for 2011 Iran has the responsibility for coordination any meeting with the Vienna based secretariat. The next scheduled meeting is not until June 2nd.

You have to realize that Iran is broke. Production has stagnated due to lack of buyers and lack of spare parts for critical oilfield components. Iran would like nothing better than the see $120 oil so they can get some breathing room from the weight of the nuclear sanctions. They would also like to stick it to the west in retaliation for the sanctions and for Iraq. This makes them short sighted in wanting a quick fix and not understanding that high prices can crush demand and knock oil back to $60 if the world falls back into recession due to high oil prices.

Iran, Venezuela and Libya have all said publicly that $100 is a fair price for oil. Venezuela can't even produce up to its quota so every dollar increase is a windfall for them.

The wildcard here is Saudi Arabia. The Saudi oil minister has said repeatedly that $70-$80 is a fair price for oil. Obviously that means the Iranian minister has not communicated with Saudi or he could not claim "none of the OPEC members find $100 oil concerning or irrational." There are quite a few analysts who believe Saudi is going to start producing more oil to lubricate the market and prevent prices from moving higher.

Saudi has done it more than once in the past and by over producing they force the price lower until the other OPEC countries fall in like with Saudi wishes.

Brent crude broke over $99 on Friday and a 27-month high. U.S. crude futures rose to $91.54.

Merrill Lynch said on Friday OPEC has an opportunity to be a leader here by stabilizing prices so the global recovery can continue or be a spoiler by letting prices rise even further when they have the power to halt the rise. OPEC is universally hated by most consumers. I doubt OPEC members really care what western countries think about them as long as the dollars continue flowing.

Merrill believes a touch of $100 by the WTI contract will have Saudi calling for a meeting to raise production or simply taking the matters into their own hands with help from Kuwait and the UAE.

Christopher de Margerie, CEO of Total S.A., said prices are rising because of global demand but they are rising too fast. Despite his comment he also said prices are not rising solely on demand but speculation on anticipation of future demand. "Today oil prices are dictated by the market because there is no shortage of oil."

Morgan Stanley believes we have some room in prices before demand destruction really takes hold. "U.S. oil demand accelerated in the second half of the year and we are a ways from critical price levels." In the U.S. gasoline is just a few cents over $3 and tolerable. If it were to stabilize at this level there would be a limited reduction in driving. With oil at $91 and gas at $3 we could see prices rise to $100 and gas to $3.50 but that is where the consumer starts changing driving habits.

Analyst firm Capital Economics predicts the price of oil will fall to $75 in 2011 because supplies are still plentiful. There is no shortage and should not be a shortage in 2011.

Opinions are like noses, everybody has one. Brokerage firm Auerbach Grayson claims crude may surge to $117 by year-end if it can break through resistance at $98 this spring. Richard Ross, a technical analyst at the firm claims if you remove the "speculation spike" in 2008 from the chart you get a double top at $98 in 2007-2008. I a not a fan of just removing prices from a chart because they don't fit your bias but different strokes for different folks.

Part of the problem with the large spread between Brent at $99 and WTI at $91 is the new TransCanada Corp pipeline that started in November. This has pushed inventories at Cushing Oklahoma up +18% since November. At the same time outages in the Norwegian section of the North Sea have limited supplies of Brent crude. This caused a short squeeze in the Brent contracts and increased the difference between the two contracts.

Commodities in general declined on Friday after China hiked reserve rates for the fourth time this year and the seventh time since 2009. This move was a 50 basis point hike. Investors are worried China is going to tighten the screws too tight and drastically slow the economy. China is facing some severe inflation, officially 5.1% but unofficially over 20%. This suggests China will be forced to act several more times and take even more drastic measures to bring inflation back down to a tolerable range. China has raised the minimum wage twice over the last year by 20% each time. This is a sign there are some internal stresses not being reflected in the government economic reports. China supposedly has an unlimited pool of workers but being forced to raise minimum wages shows that labor pool may be thinning out.

Jim Brown

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