Iran, Gas, Alaska, Gold and Silver

Jim Brown
 
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The supreme leader of the Iranian people threw down the gauntlet over the nuclear issue on Friday with statements sure to increase sanctions on Iran.

I wrote about the Iranian rope-a-dope on Wednesday and how the negotiations would never be successful. That was proven when the IAEA talks broke up again after only a few hours.

On Friday the supreme leader Ayatollah Ali Khamenei spoke on the issue and his comments will only get Iran into further trouble. He said Iran does not want nuclear weapons. That is not a new claim but most analysts believe it is false.

The bigger issue was the next sentence. "If Iran wanted nuclear weapons no world power could prevent Iran from obtaining one." That could be seen as a direct challenge to the U.S. and U.N. and produce another round of sanctions. Until Iran's posture changes from active nuclear research and a combative mindset the sanctions will only increase.

The IAEA said production of highly enriched uranium has escalated and Iran will have enough for a bomb by midsummer and they will have enough for an additional bomb every six weeks thereafter. The IAEA said Iran has doubled its efforts in just the last six months.

Iran has gone from seven nuclear sites to more than 20 sites where research and/or enrichment are being done. The exact location of some of those sites is not known.

The U.S. has always said "the military option is on the table" but Iran does not believe it. They have watched us push Israel away from a military attack and for Iran that shows the U.S. does not have the will to escalate the issue either. Iran sent observers into North Korea last week to watch their third nuclear test. If they don't want the bomb then why send Iran's top nuclear scientist to watch North Korea?

Iran has watched the U.S. negotiate with North Korea for decades in an attempt to keep NK from gaining nuclear weapons and despite the harshest sanctions on the planet the country is now in possession of nuclear bomb technology and missiles capable of delivering those bombs. Why should Iran believe their outcome will be any different? If they can continue to delay the talks they will eventually run out the clock and score their own nuclear arsenal.

Even worse, Iran has been developing ballistic missiles from North Korean prototypes. The top Iranian nuclear scientist, Mohsen Fakhrizadeh Mahabadi, rarely leaves Iran for fear of assassination but he went to North Korea last week. He is tasked with developing a warhead small enough to fit on the new Iranian missiles. You may have seen the North Korean claims that the weapon tested was a "compact, powerful device." Japanese intelligence and officials in South Korea claimed the object of the test was to develop a warhead to fit on the North Korean missiles. If NK is successful they will sell the technology to Iran. That is how Iran got much of its enrichment technology in the past.

Iran has returned the favor by giving North Korea missile technology of their own. Satellite photos show upgraded facilities at North Korea's missile launch site, Musudan-ri, that show identical designs to an advanced Iranian missile site at Seman.

The confrontation with Iran is winding towards its eventual conclusion of military action. Almost nobody believes the Obama administration has the backbone to actually attack Iran but they can't allow Iran to build an inventory of nuclear weapons. Having a nuclear Iran would produce calls for other countries in the region to also develop nuclear weapons as a deterrent. The only way to slow that arms race would be to prevent Iran from succeeding.

Israel has warned that Iran will cross the redline this summer when it finally gets enough uranium for its first bomb. Israel has vowed to take action rather than let Iran develop the means to wipe Israel off the map. With the Iranian leadership promising to erase Israel in various speeches over the last several years the Israeli leadership takes the threat seriously.

The Iranian problem could come to a head by midsummer and it will have an impact on oil prices.

Iraq and Saudi Arabia cut exports in December while Venezuela boosted shipments to the highest level in four-years. Iraq cut shipments by -10% to 2.35 mbpd. Saudi Arabia cut shipments to 7.06 mbpd, a minor drop of 1.3% but well below their 10 mbpd production at the peak last year.

Venezuela increased shipments by +19% to 1.97 mbpd and the most since July 2008. Nigeria boosted shipments by +14% to 2.29 mbpd and Angold increased shipments by +5.6% to 1.7 mbpd. Kuwait shipments remained flat at 2.06 mbpd and Algeria declined by -5.5% to 685,000 bpd. Iran, Libya and the UAE did not submit their data.

Natural Gas Glut Continues

Natural gas drilling has been declining for more than a year with the weekly well counts from BHI showing active gas rigs have fallen to 421, the fifth decline in six weeks. Oil rigs rose +7 to 1,337. The decline in gas rigs has knocked the total gas rig count down -55% from 936 at its peak to the 421 level today.

Unfortunately the EIA said the total gas production rose to a record high in November and that was the third consecutive monthly high. Natural gas liquids have increased to much that prices declined -26% in Q4 according to EOG.

While dry gas drilling has nearly died the associated gas from oil wells and liquids rich wells is still pushing the overall gas production to new highs. Prices are on the verge of breaking winter support levels and head back to the $3.15 range in the spring.

The EIA expects gas consumption in 2013 to average 70.3 Bcf per day. Production reached 70.4 Bcf per day in November. That puts current consumption right at daily production but that production is rising. Gas imports are declining and exports to Mexico are rising. LNG imports into the U.S. is almost dead and work is progressing to permit and build export terminals to offload our expected surplus of gas in the years to come. Electrical generation will consume 22.6 Bcf per day.

With current production exceeding consumption and rising the price of gas is not likely to move higher for the rest of 2013. Weather trends will be of some impact but there is plenty of gas capacity that can be turned on with minimal effort. Thousands of wells remain constrained and thousands more are waiting on higher gas prices to be completed. Production in the Marcellus is rising sharply and drilling is actually increasing there in order to hold leases with production.

Aggressive traders might want to short some natural gas futures on the next winter storm bounce.

Shell Pouring Money Into the Arctic Sea

After aborting efforts to drill in the Chukchi and Beaufort Seas in 2012 Shell is putting a halt to 2013 drilling as well. Shell is sending both its deepwater rigs to Asia for repairs and upgrades.

Shell has already spent $4.5 billion on the arctic drilling effort and has zero to show for it. Ice pushed one rig off station and neither rig got more than site preparation done before they were forced to flee the region.

It was not just the rigs having trouble with the harsh conditions. Support vessels were also having their share of problems. The specially equipped tow vessel, Aiviq, suffered engine failures under tow and lost its tow lines in a highly publicized event. The rig Kulluk was set adrift and ran ashore near Kodiak Island.

The rig Noble Discoverer suffered failures of equipment that brought with them increased regulatory scrutiny that delayed work.

The Kulluk has been anchored in the Kiliuda Bay after sustaining flood damage and damage to its generators after losing its tow and running aground in a major storm. The Discoverer has been docked for several weeks in Seward Alaska where the Coast Guard inspections revealed deficiencies in environmental and safety systems.

Shell expects both ships to depart for Asia in the next 3-6 weeks with a journey that will take up to four weeks. The Discoverer, under contract to Shell for $244,000 per day, is going to a shipyard in South Korea. The destination for the Kulluk is unknown.

Shell said they are exploring a range of options for 2013 drilling. With their rigs out of service for the next 3-5 months it would appear the 2013 drilling season off the coast of Alaska will be very quiet.

Silver and Gold

Gold prices fell -$58 last week to close at $1610. Silver lost -$1.68 to close at $29.75. I received quite a few emails asking about direction. There are multiple reasons for the decline in gold, which depressed silver. Gold is seen as a wealth preservation investment. When inflation is rising or uncertainty is gripping the markets the big investors head into gold. Over the last several years gold has risen as a result of the QE from the Fed and the problems in China and Europe. In theory with 17 central banks either printing new money with QE or using some other form of monetary stimulus today you would think gold prices would be soaring.

The problem is not that QE has lost its luster for the precious metals but stocks are shining brighter. With equities on the verge of breaking out to new highs, China recovering and hopes for the U.S. economy increasing the big players want to own equities. Several billionaires filed SEC 13F documents last week showing they sold or reduced their gold holdings at the end of Q4. Citibank downgraded their estimates for future gold prices by -6.5%. Everything weighed on gold in the same week and critical support at $1650 broke.

It should be noted that the decline came in a low volume market. Chinese markets were closed the entire week for New Years.

More than one analyst is confused about the decline in prices when the supplies in the physical market are actually shrinking. Gold lease rates are rising for the first time since last August. Apparently bullion banks are getting requests from depositors to return their gold. Gold in registered accounts rose on the January 31st COMEX report. That could be a leading indicator that gold inventories are about to decline and that is what the COMEX numbers are showing.

The CFTC report showed a collapse in the number of short contracts on gold. This could be a capitulation event where institutions are giving up on the short outlook for gold and they are liquidating their contracts to put that money into equities. At the same time the short interest for silver is at record highs. I am hoping for a short squeeze.

Silver is being sold at a high premium to spot. Silver dealer Apmex was offering silver coins at a 14% premium to spot last week. If silver was plentiful and demand low the premium would be decreased. It was as low as 10% on February 5th.

The expected improvement in global economics and rise in equities caused an -8.3% decline in investment in gold bars, coins and ETPs in Q4 according to the World Gold Council. However, for the full year it was up +51%.

Central banks around the world are buying large amounts of gold? Why? China has been a net buyer of gold for months along with Turkey, Kazakhstan, South Korea and Brazil. Central bank buying rose +17% in 2012 to 534.6 tonnes. That was the highest level since 1964. They purchased 145 tonnes in Q4 alone, an increase of 9% over Q4-2011. It was also the eighth consecutive quarter that central banks bought gold. Germany is trying to bring all its gold back to Germany for "safety" but the New York Fed won't give it back all at once. They want to deliver it over the next ten years in small quantities each year. I smell a conspiracy there.

Russia increased its gold holdings by +8.5% in 2012. Q4 demand in India jumped +41% to 261.9 tonnes and a six quarter high.

I believe once the Chinese markets open again we will see an increase in volume and a rebound in prices. We may not have seen the bottom simply because commodity selloffs tend to be an exercise in overreaction and we really have not seen that yet.

The dollar is the key for this week and the direction of the equity markets will also be a factor. If equities weaken from their 12 week rally the luster of silver and gold will return. That assumes the dollar is not spiking simply because other currencies are imploding. Obviously there is no fundamental reason for the dollar to rise with Congress completely dysfunctional at this point and the Fed pouring new money into the abyss.

Jim Brown

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