Friday, April 6, 2012

April 6 Observations

North Korea

News sources has stated there will be 2 South Korean AEGIS ships, between 3 and 4 Japanese AEGIS ships, and between 4 and 5 US AEGIS ships monitoring the upcoming North Korean rocket launch. US and Japanese warships are suspected of carrying SM-3 anti-ballistic missile interceptors. As long as the rocket does not deviate from the announced trajectory, it is highly doubtful there will be any kind of shootdown. With the Rocket expected to fly over the Yaeyama Islands, which will likely feature either a US or Japanese warship in that area, things could get interesting. It is unclear if South Korea can shoot down a ballistic missile launched from North Korea even if they wanted to.

The North Koreans reportedly have 3-4 mini-submarines that have recently deployed from an East Sea base in North Korea. It is training season for North Korean submarines, but it was also training season for North Korean submarines when the Cheonan was sunk in March of 2010. The rocket launch is taking place from a base on the other side of North Korea.

With the frenzy of activity taking place related to North Korea, it has become more and more clear that Japan and South Korea are looking to send some punishment in the direction of North Korea. North Korea is being provocative, but that doesn't necessarily mean they have intent to escalate. China and the US appear to be working overtime to restrain everyone in the region, and of all the kinds of cooperation one could see in the 21st century from China and United States, it strikes me this is the most important kind.

Iran

From the New York Times:

A major Chinese ship insurer will halt indemnity coverage for tankers carrying Iranian oil, beginning in July, two of the insurer’s officials said Thursday, amid tightening Western sanctions against Iran and after similar action in Japan.

The decision by the insurer, the China P&I Club, is the first sign that refiners in China, Iran’s top customer for crude oil, may struggle to obtain the shipping and insurance to keep importing from Iran. Iran’s other top customers — India, Japan and South Korea — are running into similar problems, raising questions on how Tehran will be able to continue to export the bulk of its oil.

The price of Brent crude oil is up 16 percent since the start of this year on concerns that Iranian supply may be disrupted because of Western sanctions.

The China P&I Club, whose members include shipping companies like Sinotrans and Cosco Group, is the first Chinese maritime insurer to confirm that it will halt business with tankers operating in Iran.
China doesn't say no to money without a good reason, particularly when they have a monopoly. It is unclear if this is a result of sanctions working as intended, or the State Department working overtime - but either way this is quietly a significant victory against the Iran regime as part of the Obama administrations policy of diplomacy in dealing with the Iranian nuclear program. There is, of course, a disturbing flip side to this. Insuring the flow of oil to China would, in theory, be a major political consideration by Iran that would usually discourage the Iranians from closing the Strait of Hormuz during hostilities. This development is a double edged sword, on one side this applies tremendous economic pressure on the energy sector of the Iranian economy, but on the other side it removes a key incentive that would normally dissuade Iran from closing the Strait of Hormuz during hostilities.

Saudi Arabia

Based on latest figures from the Department of Energy (FTP), the US imports a daily average of 1,470,000 barrels of oil, which averages out to about 44.7 million barrels per month. We have already discussed Saudi Arabia chartering 11 VLCCs and sending that oil to the United States, and each of those VLCCs is expected to bring about 2 million barrels per vessel. It appears that was just the beginning, and Saudi Arabian state owned Vela has chartered 3 additional VLCCs for the same purpose. 14 VLCCs each carrying 2 million barrels means the United States is expected to import at least 28 million additional barrels of oil from Saudi Arabia over the next two months. That is slightly more than a 30% increase in US oil imports from Saudi Arabia for April and May.

All news reports on this activity are quoting analysts who believe this is the beginning of a major program. This seems very odd to me. Saudi Arabia recently ramped up production by 1.5 million barrels a day, but that ramp up was primarily done to compensate for oil expected to be lost from market due to sanctions from Iran, who was last known to export around 1 million barrels a day. That increase in production also takes time, and can't simply be turned and off like a light switch. It is also worth noting that Saudi Arabia has not decreased export of oil to any other nation, meaning this is all additional oil on the market. For Saudi Arabia to ship out 28 million barrels in a massive VLCC charter program in such a short period of time, they would have to draw that oil from standing stock. If this program is simply ramping up to something bigger, and more VLCC charters are expected, that means Saudi Arabia has begun a program that essentially transfers their existing standing stockpile of oil to other nations.

It is very difficult to imagine that Saudi Arabia would ship their standing stockpile of crude overseas without a damn good reason - a much more important reason than some Presidential election in the United States. Indeed, if one was to start listing all the plausible reasons why Saudi Arabian leadership would give up the very commodity that gives them their political power and influence globally, the only reason that makes any sense at all is that the Saudi Arabian leadership must believe those standing stockpiles of oil are facing legitimate risk.

While I am aware that Saudi Arabia holds offshore stockpiles of around 10 million barrels in Rotterdam, Sidi Kerir, and Okinawa; does anyone know how big the stockpile of oil is in Saudi Arabia?

If we continue to see the VLCC program expand and more oil continues to be shipped out at a rate greater than the rate of accumulation, the most plausible scenario is that the Saudi's must believe war is about to break out over the Middle East, and for some reason the rest of us can only speculate about, Saudi Arabia believes they will be a target in such a war.

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