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Catching a Falling Financial Knife

All You Need to Know About Iran, $200 Crude Oil, and $6.00 Gas

Commodities / Crude Oil Jan 16, 2012 - 07:13 AM GMT

By: Money_Morning

Commodities

Best Financial Markets Analysis ArticleJason Simpkins writes: If you're unsettled by the thought of gasoline at $4.00 a gallon, brace yourself.

With tensions between Iran and the West quickly escalating, we could see gas jump to $6.00 a gallon at the pump in a matter of months.


Make no mistake about it: If Iran were to follow through on its threats to close the Strait of Hormuz, oil prices would surge as high as $200 a barrel in matter of days.

But that's just the beginning...

A wider Iranian war could throw the entire region into chaos -- making $100 oil seem like a bargain.

None of this is hyperbole. In fact, these dangers are likely according to of one of world's leading energy analysts, Dr. Kent Moors.

Dr. Moors is an advisor to six of the world's top 10 oil companies, including natural gas producers throughout Russia, the Caspian Basin, the Persian Gulf and North Africa. He also consults for high-level officials from the U.S., Russian, Kazakh, Bahamian, Iraqi and Kurdish governments on all things energy related.

In short, Kent's insights are invaluable.

That's why we've given Dr. Moors a chance to address all of the concerns swirling around the energy market today.

In the interview that follows you'll learn what you really need to know about Iran, the global oil market, and most importantly, what you can do to profit...

Dr. Kent Moors on the Brewing Crisis in the Gulf
Q) Dr. Moors, how serious are the recent developments in Iran?

Moors: This is the most serious U.S.-Iranian crisis since the fall of the Shah in 1979. There's a very dangerous situation inside Iran that is only being accentuated by the oil market problems that have resulted from Western sanctions.

First off, on the Strait of Hormuz: This is the most significant oil choke point in the world. Some 35% of the world's seaborne oil shipments and at least 18% of daily global crude shipments pass through this narrow channel in the Persian Gulf. And while the Iranian Revolutionary Guard Navy is not large enough to blockade the Strait of Hormuz for any length of time, it could disrupt traffic.

Q) What effect would closing the Straits of Hormuz have on oil and gas prices?

Moors: Closing the strait would result in a rise in crude oil prices of between $20 and $40 a barrel in a matter of hours. Any interruption beyond 72 hours would push prices to between $150 and $200 a barrel.

As far as gas prices are concerned, the basic rule of thumb is that each $1.00 rise in a barrel of oil results in a 3.2-cent rise in a gallon of gasoline. So $200 oil would equal $6.00-plus gasoline.

Q) Why is this crisis unfolding right now?

Moors: Three major elements are causing Iran to become belligerent:

1.Massive economic and political problems inside the country.
2.The last round of sanctions that restricted Tehran's access to international banking.
3.And the European Union's (EU) decision to boycott Iranian crude imports.
I'll explain each of these further.

First, Iran is undergoing significant economic and political problems. The rial (the Iranian currency) has inflated almost 80% against the dollar in less than a year. The government has not accounted for almost $120 billion in oil proceeds kept out of the country, resulting in a split between Iranian President Mahmoud Ahmadinejad and some of his former supporters in the Majlis (parliament). Several of the president's closest advisors are, or shortly will be, under indictment for corruption. That includes a multi-billion dollar case of banking fraud, the largest in the country's history.

Ahmadinejad is in a flat out political war with both the supreme religious leader Ayatollah Khamenei and major clerics.

Now come the sanctions, which have gotten unbearably strict.

The last round of U.S., EU and United Nations (UN) sanctions began cutting Tehran off from international banking. Since global oil sales are denominated in dollars, access to exchange and clearing banks is essential.

Germany, under pressure from Washington, closed Europäish-Iranische Handelsbank (EIH). This small bank is Hamburg-based but Iranian-owned and registered by the Bundesbank (German Central Bank). American intelligence and Treasury officials are convinced (almost certainly correctly) that EIH had been a primary means through which Tehran accessed the international exchange, acquired equipment for its nuclear program, financed arms deals, and provided subsidies to Hezbollah and Hamas.

That was followed by the end of Asian Clearing Union (ACU) services for Iranian oil sales (despite Iran being one of the ACU members). That resulted in a full-blown crisis in India, where Iranian crude imports are essential. New Delhi had no mechanism to pay for the consignments until it set up a very inefficient system of rupee accounts in Turkish banks to exchange them for rials.

Iran must now resort to inefficient and costly substitutes - such as shadowy exchanges around the Dubai Exchange and barter arrangements (especially with China) via the Singapore Exchange. Since China has a trade surplus with Iran, it can effectively finance its crude purchases with its own exports.

Finally, the EU has decided to stop importing Iranian oil. Europe is the second-largest buyer of Iranian crude after China. Iran cannot find customers to replace such a large volume in short-order. The EU must be careful not to spike the price of crude through such a policy, especially for certain member countries already having problems of their own.

Greece, for example, usually receives a third of its crude oil directly or indirectly from Iran. Spain also would be immediately impacted. There's also a range of daily swap contracts in Europe involving Iranian oil as an element. These would also be thrown out of balance resulting in a price rise.

Risk is now an exacerbating concern in the oil market. The Iranian situation is rapidly becoming a major crisis.

Q) So what's the next move? How do you see this crisis playing out over the next several months?

Moors: The crisis will probably intensify. Western intelligence agencies have already concluded Iran will get nuclear weapons at the current rate of development. The attempt now is to destabilizeIran internally - hence the latest round of sanctions. Tehran will not allow this to happen. Threateningto close the Strait of Hormuz is one response;moves to destabilize the regionwill be another. Iran is a main sponsor of both Hezbollah and Hamas and neitherof these will sit idly by and have a financiallifeline cut.

Saudi Arabia will increase its own pressure against Iran, while any genuine attempt toclose the Strait will be met with an immediate Saudi response.

Q) Finally, how can investors profit? In the past, Money Morning has advocated exchange-traded funds such as the United States Oil Fund LP (NYSE: USO) and stocks as Suncor Energy (NYSE: SU) as ways to profit from higher oil prices. Are these stocks still good investments?

The longer the crisis remains, the greater the benefit from emphasizing North American-based production.

Companies - like the Calgary-based Suncor - that are active in Canada's oil sands are one way for investors to go. According to the government of Alberta, nearly 173 billion barrels of recoverable oil rest in these tar sands, based on current production costs. This represents nearly 75% of the total North American reserves currently available. Canada is the largest supplier of oil and gas to the United States, shipping approximately 75% of its exports here each month.

Kent discusses energy-related investment opportunities in depth in his ever-popular Energy Advantage newsletter.

You can learn more about his Energy Advantage newsletter and the coming oil supply constriction by clicking here.

Source :http://moneymorning.com/2012/01/16/all-you-need-to-know-about-iran-200-oil-and-6-00-gas/

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Catching a Falling Financial Knife