Oil Should Be Higher

Interesting performance of oil in the context of world financial markets, and industrial activitity world wide over the last 6 months. For the last 4 years, our own model for oil prices has not been terribly bad, however, right now the model has us at about $89 dollars with an extended run up into $110-115 or so. It's nowhere near doing that.

So we've got some sort of "not knowing what we don't know" going on. What could be the big factor that we are missing? Mostl likely in this case it's politics. Specifically the confrontation between Saudi Arabia and Iran over leadership as a regional power.

Right now the likely culprit could be Sauid Arabia and other gulf states cheating and pushing up oil production. Their primary motive could be to generate pressure on the Iranian effort to develop nuclear weapons as well as their efforts to radiciliz Shiites inside the Sauidi peninsula to forment unrest (recent headlines in Yemen as an example).

There could be another motivation for the Saudi's which is the rogue Russian production which has exploited the recent OPEC cutbacks by pushing up its own production.

This has happened before as the Saudi's and Kuwaiti's have used oil as a political weapon against Saddam Hussein. Oil right now is just above the price where it starts to cause pain to Iranian finances ($70). If it were to fall into the 50s or 60s, and stay there for an extended period it could present a big problem for the Iranian regime and keeping the Revolutionary Guard in power.

For the Saudi's the timing of a big burst of oil could also make sense as a counter to political moves in both the United States and China to pursue "green energy" policies such as electric cars, natural gas etc. If oil stays low for an extended period, people will forget the pain of high gas and energy prices.

If this occurs, some impacts could include:

• A rise in the dollar as the US current account account improves. Oil is a huge part of the US trade imbalance which has recently started to worsen again.
• A return to destabilization in Russia and Venezuela, particularly in their equity and currency market.
• Oil in the $50-60 range for an extended period could wash out quite a few longs causing a further downward spiral even lower.
• A decline in natural gas as needs for alternatives decline. Same with solar, wind.
• A big push for an energy bill in Congress could die down pressure to pass a bill
• Negative for exploration and drilling.
• A move like this could make all energy related holdings, especially leveraged ones -- subject to material declines.