Tuesday, January 31, 2012

Iran + Avg Crude Prices: Will Global Growth Suffer?

While doing some analysis of the global and the american (US) crude oil market I got to the chart below.
What is interesting about this?

Below you will find the weekly Brent Crude 1st future price and its 52-week moving average (so average price for the year-ago).

The YoY changes go as indicated:
• 2007:  +11%
• 2008:  +33%
• 2009:  -35%
• 2010:  +28%
• 2011:  +38%

Some will argue that US is a WTI-based crude price, etc, but that's simply the Cushing/OK delivery point price. Physical crude prices around the US are actually closer to Brent as there is a technicality regarding regional supply/demand at the NYMEX crude delivery point.

Anyway. I didn't do any studies on this. I just wanted to point to the ladies that the past year experienced the highest average crude prices ever.

Now check out the AAA US Average Gasoline price chart, same smoothing thingie:


What are the odds of a US-fueled strike on Iran? There's no way that Israel would make this decision alone considering the crazy days we live in.

Game theory time:
- If energy prices go even higher due to supply disruption in the Middle East and more risk premium is added to the pricing curves...
- higher industrial and personal costs of energy will affect corporate profits / disposable incomes...
- that will affect final sales...
- that will impact global growth expectations...
- that will likely cause a negative loop into financial markets...
- erasing some good amount of global wealth...
- that should impact confidence...
- with already such low global aggregage growth momentum...
- and monetary policy that doesn't pass through to economic activity in delevering economies...
- for governments that are already knee-deep into fiscal problems.

So... Iran is gearing up nuclear weapons or so say the Israeli.

We're in the beginning of the 21st century. We live in a globalized world. Many countries depend on global oil exports. Iran can't support itself without selling lots and lots of crude oil at decently high prices. It must import a lot of what it eats, not to mention other things it consumes. Today some 500kbd of oil @ 100 bucks (it's closer to USD110/bbl) = USD 50mln/day = 1.5bln/month. Iran exports over 2.5mbd... so USD 7.5bln/month in receipts. What a number.

Now what is inside an iranian leader's head: "I am building a weapon of mass destruction. If I use it oil prices will explode, but my country will be swiftly taken over by global military and I will lose power and go to jail or die" or "if I attack there will be political and economic sanctions to my country and my petrodollars will be worthless while my neighbors will still get all the revenue from much, much higher oil prices and could attack me later on when I am weaker, without supplies and while my people starve and kick me out of power". I don't think religion trumps hunger. Not a chance. And I don't think a leader wants to fight a war he can't win.

So what is inside an iranian leader's mind? I'd guess "let's move on with nuclear project to keep this risk premium high enough so we can (a) team up with someone who takes no sides, at least temporarily [China+India?], but needs oil and (b) sell lots and lots of oil at high prices (c) and later let them check our installations, take our weapons away at a reasonable price" or something.

Obviously you can see I understand nothing about Israel x Iran. That is certainly true. I can notice the grudges. I can listen to arguments from both sides. But deep inside my heart I will never really u-n-d-e-r-s-t-a-n-d this grudge. It seems illogical to me. It dwells into ideology, faith and memories of a distant past that most now alive didn't even live through. This grudge speaks nothing about well-being and plain happiness. It seems to me it is more on ego. But who am I to judge. Smarter more experienced people think otherwise, I guess.

Now what can OECD / US / etc politicians have in mind if they organize an attack on Iran?
(A) Even if they hurt us with missiles and other warfare [considering there's no ready-to-shoot nuke] we will get them really quick through economic, political and military assault.
(A.1) Economic: the iranian population would revolt against the regime which would lose popularity after their people starve, etc. Energy-assets would be western again and there'd be much more peace in the foreseable future after the demage is repaired in 5-10 years. Oil risk-premium would collapse and average crude oil prices should come down considerably boosting global growth and easing the fiscal situation of countries like Japan and the US.
(A.2) Political: I'm not good at commenting about politics.
(A.3) Military: the country would be devastated swiftly in order to contain high crude prices and restore calmness in the Persian Gulf.
(B) Crude oil prices would explode upwards and would cause severe strains in an already-tough global economic environment, then collapsing after the war is controlled, demand weakens and supply is restored at least partially.
(B.1) Recession again.

Food for thoughts.... bed time. I only have time late at night now to write as during day time the focus has become more micro.
Interesting fact: US crude oil demand is down now sequentially since 2008 while their production is reaching new highs (not to mention their natural gas production too, new highs, while, without storage capacity or instant ways to export it, it makes new lows every year).

*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader AT gmail do com

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