Iran Making Us Money Today

Jim Brown
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Crude futures rocketed higher this afternoon after Iran News claimed a major oil pipeline in Saudi Arabia had been blown up and was on fire. WTI rocketed to more than $110 and Brent crude traded at $128.

Iran claimed the crucial pipeline had been targeted by Shiites living in Saudi Arabia. Iran claims that tomorrow is the anniversary of Fatima Zahraa's death, the prophet Mohamad's only daughter. As such they claim it is an important and symbolic date for Saudi Shiites and might constitute a suitable timing for an escalation of violence against Saudi oppression in the region.

Reportedly the pipeline between Awamiya and Safwa had been targeted. The press release even had a picture of the burning pipeline.

Pipeline Fire

Crude prices spiked over $5 on Brent when the news broke and WTI spiked to more than $110.

WTI Crude Chart

Brent Crude Chart

However, prices quickly faded because Saudi Arabia immediately denied the report. Saudi officials said the Iranian report was untrue. They said there was no explosion although there was a small oil fire over a mile away from the pipeline.

There is almost no way to know for sure in real time if the reports are accurate from either source. Iran and Saudi Arabia are adversaries. Saudi will not want to acknowledge any Shiite terrorist act because it would embolden others to try and copy the event. Iran will want to keep the news slanted towards a terror act because it pushes up oil prices.

Baker Hughes ($BHI) reported today that Saudi Arabia had doubled drilling activity over the alst year. Saudi had 49 active rigs in January compared to 23 in January 2011. That is a four year high but below the peak of 57 active rigs in August 2007.

Saudi is currently producing about 9.8 to 10.2 million barrels per day depending on which source you use for the data. Saudi claims they have 2.5 mbpd of spare capacity but why double your rig count if you are all that capacity just waiting for the valves to be opened?

Some analysts have recently calculated there may be less than 1.0 mbpd of spare capacity including Iran's production. If Iranian oil sales were to be materially degraded that would take up to 2.0 mbpd of exports off the market and leave the world short of oil.

I seriously doubt Iran will lose more than 1.0 mbpd of buyers because India and China will buy as much as they can. Each are currently buying more than 500,000 bpd from Iran.

The bottom line here is oil production. We hear a lot about the increase in "liquids" production and that includes natural gas liquids or NGLs. Unfortunately NGLs are not oil. They cannot be turned into gasoline and diesel. So hearing that "oil" production is now over 90.0 mbpd is not exactly true. It is hard to tell how much of that is actually NGLs and how much is really oil. This is another way the energy establishment clouds the actual production numbers.

I believe Saudi will be called upon to raise production to 11.0 mbpd as Iran sales decline. Even if Saudi can actually produce that much it will put us right back at the "zero margin for error" production rate. If anything happened to slow Iranian production any more like an attack by Israel or a sudden change of heart by India and China to abide by the embargo then the world could actually experience a shortage of oil.

Gasoline prices are going to record highs this summer. You can count on it. Analysts are predicting $4.50 per gallon on average with some estimates even higher. That would be enough to push the U.S. back into a recession.

Fortunately Iran is working for us this summer. These weekly headlines pushing up the price of oil are putting money into the pockets of energy investors.

Jim Brown

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