Oil down $20/bbl for the Month of May 2012

[flyingcat2k]

The news toda in the oil trading pits was that Iran is beginning to squirm under the new sanctions. Basically, unless you are on a very short list, countries can no longer do business or have accounts with the Iranian Central Bank. This was the main clearing house for all Iranian crude on the world market. This also means no foreign exchange and no international wire transfers for Iran or Iran's citizens (who largely use the black market for this anyways). Apparently, the Iranian foreign ministry contacted the Iraqi foreign ministry. The speculation is that this is to begin to set up talks about the uranium enrichment program. The short list of countries still allowed to buy crude are India, Pakistan and China. Although China is under pressure from the US (hahahahaha) to buy less Iranian crude. According to news reports, China's purchases have dropped from 650,000 bbl/d in 2011 to 400,000 bbl/d today. The higher number accounted for 22% of all Iranian sales last year.

This is my opinion.

The Saudis (Suni), who do not like Iran (Shiite), smell an opporunity to sink the oil price. The growing supplies of crude and NGLs in the US and its shrinking dependency on non-Western Hemisphere oil is not supposed to happen. This has greatly reduced OPECs upside pricing power. However, OPEC countries can put in a massive "put" (meaning prices go down) position by flooding the market with cheap Arab Crude. This reduces the pricing that the Iranians get for their oil and allows India and Pakistan to buy more Arab and Indonesian supplies. In summary, the world is trying to cause a financial crisis in Iran and bring them to the bargaining table.

What does this mean for US oil prices? Prices are going to sink further and cause another "breather" much like in 2008 during the US crisis. Given the fact that Bakken crude is sweeter and lighter (thus should be worth more) than WTI, you could see some curtailment of drilling and fracking. I don't think it will all go away but you could see the number of rigs drop by a third by the end of 2012. You could also see a crude price below $60 if the other OPEC nations get serious about reigning in their Iranian members.

It should be noted that this is WITHOUT a European banking crisis. The vast majority of crude purchases go through a European bank in Europe or in London. Given how tied London is to other banks on the Continent, a credit freeze in Paris or Frankfurt would also make London a very difficult place to do business. Millenium Wave (a stock analyst group that has some good credentials) recently forcast that crude would bottom out at $13 a barrel. Yes, $13/bbl. The only way I can see this occuring is if we flood the crude market and then Italy or France have a sovereign debt crisis.

Personally, I don't think we could see prices below $40 by the end of the year, maybe March of 2013 if there is another warm winter.