FYI | Sep 01 2006
By Greg Peel
Markets have spent the week breathing a sigh of relief as Hurricane Ernesto has gradually been downgraded to a tropical storm. Fears were heightened as the world reflected one year after Katrina. The irony is that heavy rains falling along a dry eastern seaboard in the US were actually welcomed.
Ernesto provided some impetus for the oil price to slip below US$70/bbl, and as supply figures were looking relatively healthy talk began of a genuine pullback in oil prices. But to expect a pullback was to ignore Iran.
Last night marked the deadline imposed on Iran by the UN to cease the enrichment of uranium or face economic and diplomatic sanctions. In short, Iran refused to comply.
Iran is OPEC’s second largest oil producer after Saudi Arabia. The question should be asked: what right does the world have to prevent a sovereign nation from establishing a nuclear energy facility when much of the rest of the world has done, or is doing so?
The answer is that few believe Iran’s enriched uranium will be used solely for energy. The Iranian president has called for the destruction of the state of Israel, and is considered by many, particularly in the US, to be an Islamic fundamentalist “madman”.
The UN has made its decision. It cannot risk an Iran with nuclear weapons capability, and hence it has threatened sanctions. Iran has made its decision: get stuffed.
Just how Iran will respond to UN sanctions is up for debate. Were it to withdraw oil exports then a very big hole would be left in supply and oil would likely race through US$100/bbl. But the irony is, Iran has no refineries. While it exports vast amounts of oil it still has to import petrol and other fuel products, and a lot of that comes from the US. In withdrawing oil exports it will also being hurting its own economy.
Does this really matter to fundamentalist Muslims? Possibly not. If Iran wanted to really make a point it could also blockade the Strait of Hormuz in the Persian Gulf and cut off Saudi Arabia’s oil exports as well.
Nevertheless, in a very thin trading environment ahead of the US Labour Day long weekend, oil turned around to rise back over US$70/bbl once more. Gold responded with a near US$10/oz rally to close at US$626.80/oz.
With further evidence of a slowing US economy, and Fed rhetoric suggesting another rate rise will not be forthcoming if signs of the slowdown escalate, the preferred safe haven of the US dollar now has less appeal. This leaves the way clear for gold to reclaim its traditional safe haven status.
There was other oil news overnight providing both negatives and positives. The two major oil unions in Nigeria, the white-collar Petroleum and Natural Gas Senior Staff Association and the blue-collar National Union of Petroleum and Natural Gas Workers, have called a three day strike, commencing on September 13. This is in protest over the death of a Royal Dutch Shell worker, killed by the Nigerian military as a boat took him to freedom following weeks of being held captive by rebels.Twelve people died in the incident.
While the Nigerian situation continues to overhang the oil market, commentators noted that past strikes have not made a huge impact.
On the positive side, an update from BP regarding its Prudhoe Bay pipeline in Canada, which has been shutdown due to corrosion, suggested the problem will be solved and sections of corroded pipeline bypassed in a much quicker time frame than previously thought.
Figures released on US oil and gasoline supplies showed that the supply side of the market is now in a better position than it was this time last year. This may become more important if another storm begins to build in the Gulf. The season’s nowhere near over.