Oil Prices Decline Slightly Ahead of Inventory Report

Jim Brown
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Analysts had predicted an increase of two million barrels of oil over the last week but the API numbers out late Tuesday claim that inventories actually dropped by 3.1 million barrels. This makes Wednesday's EIA report another test of number correlation.

I have given up trying to guess what the EIA and API will report each week. The numbers always average out over the long term but week to week they seldom jive. The API report on Tuesday said oil inventories fell by 3.1 million barrels rather than the +2 MB increase analysts expected. In a perfect world the EIA numbers on Wednesday morning would say the same thing. However, we all know, especially from the last several weeks, that what the API reported on Tuesday has no impact on what the EIA will report on Wednesday.

Even more confusing was the spike in crude prices last week when the EIA reported a gain of 3.1 million barrels. There are so many forces at work in the market that predicting inventory levels and price reaction is impossible in the short-term.

Several analysts came out with comments this week claiming the fundamentals do not support oil at $80. While I strongly agree it appears the markets don't care what the fundamentals support. I reported yesterday that that net longs by speculators soared last week according to the Nymex.

The Iran security premium may be causing some of the speculation. Iran was in the news again on Wednesday saying they were going to build their new uranium enrichment facilities deep within mountains to protect them from attack. Personally if I were really going to build 10 new facilities I would not be announcing all the details every day in the press. This is clearly a ploy to get noticed and to get more "respect" in the nuclear negotiations.

What they are going to get is more trouble in the form of sanctions. Israel warned today that countries need to boycott Iranian oil even if the U.N. was not going to pass sanctions. Prime Minister Netanyahu called for an immediate boycott of Iran's energy sector for both import and export of products. He said the U.N. security council should be sidestepped if it cannot agree on the move.

"In the world is serious about stopping Iran from building atomic weapons it needs to pass effective and biting sanctions that curtail the import and export of oil products to Iran," Netanyahu said in a speech.

Iran imports 40% of its gasoline. Netanyahu said he believe there was enough support outside the U.N. to cause Iran serious grief if everyone banded together. "If the United States, Europe and like minded countries act in unison, they can succeed in sending the desired message and forcing the regime in Tehran to rethink its nuclear weapons program" according to a spokesman for Netanyahu.

In 2008, Netanyahu's predecessor, Ehud Olmert, proposed for the U.S. to enforce a naval blockade on Iran. The spokesman declined to discuss whether the current Israeli government had similar ideas.

Iran has hinted it may strike Iran if it continues on the nuclear path. Israel has struck twice in the past to prevent enemy nations from completing nuclear facilities. In 1981 they destroyed an unfinished nuclear reactor in Iraq and in 2007 they hit a secret nuclear facility in Syria.

In other news Noble Corp (NE), one of the current positions in the OilSlick portfolio, is in talks with Saudi Arabia about adding more oil rigs to the Saudi fleet. This news came from the CEO of Noble. Last year Saudi reportedly cut the number of active rigs by 20% because of the production cut backs. In 2008 Saudi Aramco had about 130 offshore and onshore rigs in operation at peak times. The Noble CEO also said Petrobras wanted to add more rigs in the Tupi field offshore Brazil.

Argentina is about to go to war with Britain again. A British oil rig began drilling off the Falkland Islands in the disputed water around the islands. In 1982 Argentina and Britain went to war over possession of the Falklands and Britain won. It never set well with Argentina and they still claim the islands, called the "Las Malvinas" by the Argentineans.

Argentina is using every option in the book to make life hard on oil exploration there including forbidding ships from docking in Argentina for supplies and refueling and prohibiting them from using the shipping lanes in the area.

At the Rio Group summit in Mexico, regional leaders were expected to sign a resolutions supporting Argentina in the fight. Hugo Chavez was in true form and said "the English are still threatening Argentina and if conflict breaks out Argentina will not be alone this time as it was in 1982." Back in 1982 the Latin America nations were split over the conflict and some supported Britain's fight to take back the Falklands after an Argentina invasion. If the Rio Group united it would be a lot tougher for Britain to maintain a exploration group in the islands. Without a local refueling and supply port the supply lines would be extremely long and subject to interdiction by South American ships.

Britain estimates that there could be 60 billion barrels of oil in the Falklands and the prospect of this black gold going to British coffers is an extreme insult to Argentina and her neighbors. Britain already warned Argentina that the islands are much better defended today than in 1982 so the stage is set for a conflict if the LIZ 14/19-A exploration rig finds a big oil deposit.

Jim Brown

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