Could Oil Be Facing a Repeat of 2008? – Part Two

Continued from Part One.

On the other side of The Iranian Factor, acting as a counterbalance to the bulls, is the drag on demand caused by three factors:

Firstly, Europe (which is in parts either in recession or facing faltering growth, depending on what figures you look at), secondly, US consumption (that is already seeing the impact of oil prices on consumer demand for gasoline as prices approach $4 per gallon) and thirdly, slowing Asian demand, as China in particular experiences what most expect will be a soft landing, but is already hitting demand for distillates.

Indeed, it is the slowing Asian demand and the distillates markets that best underline the demand side of this equation.

A Reuters report states Asian gas oil crack spreads have also been weakening, albeit from relatively strong levels, suggesting refiners are starting to have problems passing on rising crude oil costs to consumers. The softening of crack spreads is all the more remarkable given the closure of no fewer than six Atlantic-basin oil refineries in recent months, the report says.

The balance of these two price drivers may be the estimation in the minds of the International Energy Agency (IEA) in not recommending the release of  crude and products from government-controlled stock-piles. Arguably, we faced a similar situation to the Libyan crisis when in July last year, 60 million barrels of crude and products were released to ease supply and dampen price rises, but although there has been discussion of it, so far there’s little indication any action will be taken.

Some commentators are therefore beginning to suggest the upside risks have been given rather too much prominence, and if outright military confrontation can be avoided, we could well see a sharp correction in oil prices by the second quarter — if, as expected, the realities of falling demand take greater weight than the perceived threat to what is still quite plentiful supply.

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  • Iran faces a delicate issue.  On the one hand it wants to show the world all it’s got and put it at ease, while on the other hand it fears that such show ‘n tell will give its enemies a roadmap to bomb it.
    Saddam Hussein faced a similar dilemma ten years ago. Though he wanted the world to know he had nothing to hide, he also wanted to bluff his archenemy Iran into believing Iraq still had WMD. 
    Bluffing did not go well for Saddam, and it might not go well for Ahmadinejad.
    But since the price tag for ridding Saddam proved high, maybe we ought to reflect what we are asking of Iran now.  On the eve of a threatened attack, we are asking it to take us to the depths of its arsenal and show us all it’s got.  
    Such great expectations are a sign we have been talking to our friends too long and are in need of a broader perspective.  Exactly when was the last time we asked Pakistan, India, China or Russia to show us their arsenal?
    “But those countries are not advocating the destruction of Israel.” 
    True, but Israel is not a thorn on their side either.  
    Surely, however, we can see beyond the hyperboles and figure out their underlying purpose.  Or have we forgotten that not all Iranians are thrilled with Ahmadinejad?
    He sure hasn’t forgotten. 
    Nor has he forgotten that that his countrymen hate Israel even more.  So he tells them that Israel will be wiped from the face of the earth.  Expectantly, this nonsense unites them against a common enemy. It is even a diversion from the misery and isolation brought on by his theocratic regime. 
    Quite clever work by Ahmadinejad — and not a rial spent or a bullet fired. 
    So why are we letting the crazy talk about destroying Israel get us all worked-up — to the point of turning the world topsy-turvy again.
    Can we not see the desperate attempts of an unpopular regime simply trying to hold on?


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