Middle East & Oil

Just been reading an interesting piece from Citibank's Robert Crossley on "How important for oil prices is the potential fallout from Iran?". Let's put down a few facts which Robert has put together in his piece:

32% of oil supply is from Saudi Arabia,
13% from Iran,
9% from UAE,
8% from Kuwait,
8% from Nigeria,
7% from Venezuela
and 6% from Iraq (IEA Nov 2005).

First of all, if we add the politicially unstable countries supply together, that's 34% of the world supply. The high concentration of risky oil supply is a concern. Secondly, Iran alone is producing around twice as much as the OPEC (ex-Iran) spare capacity. So for whatever reasons more countries are coming offline, the residual spare capacity will be even less. In either case, we dont have enough spare capacity to absorb oil shock. Thirdly, Iran seems to be getting ready for EU sanaction by moving money out of their European banks (http://www.chicagotribune.com/news/nationworld/chi-0601210051jan21,1,4743815.story?coll=chi-newsnationworld-hed&ctrack=1&cset=true). Maybe they are trying to create more tension and push the oil price up. Since Japanese and Chinese are large importers of Iranian oil, I guess that Iran will always have buyers for their oil. So, economically, Iran benefits from creating short term chaos.

We all know that there is not enough refiners out there in the US. Without excess capacity downstream, I think that it will be very hard for oil refiners to absorb upstream price increase. Of course, a spike can come and go. But if iran were to remove themselves from the supply list, the oi price increase can be semi-permeanent (months rather than weeks). Producer price inflation will be a direct result. The question on CPI is still unclear since the US productivity increase has been unbelivable.

The trade is still to go long oil to hedge middle east specific risk. With more and more of these potential oil supply disruption, China maybe using its fx reserve to buy oil sources. They have already tried to bid companies through CNOOC.

We need to think about the Petro money. They are probably the only nation not buying more oil with their money. So if they gain billions of US dollar a day from oil trades, how will they spend it? The Russians, Chinese, Arabs.... the huge amount liquidity they hold, perhaps they will end up buying everything they need? I doubt the Russians and Arabs will invest in alternative energy, but the Chinese may.

BCA has a short piece on oil and equity market:
http://www.bcaresearch.com/public/story.asp?pre=PRE-20060119.GIF

Good luck in 2006 Investing!