More Tea Leaves

The Navy is moving a substantial amount of equipment to the Persian Gulf that if used, would be done specific in combat against the capabilities fielded by Iran. I am simply highlighting that fact about the MIW shift to the Gulf or other recent military orders reported in media this week; not trying to start a conspiracy theory.

So maybe this other relevant activity is just a coincidence, but even as a coincidence it is very interesting. Lets start with China.

The government on Tuesday raised retail prices for gasoline and diesel fuel for the second time in less than six weeks in an attempt to keep pace with soaring crude oil prices.

Chinese motorists are now paying $4.43 a gallon for 90-octane fuel — nearly equal to the $4.45-a-gallon average for mid-grade fuel in California, according to AAA.

The reason provided is found later in the article.

The increase should ease pressure on China's two main refiners, the state-owned China Petroleum & Chemical Corp. and PetroChina Co., which are not allowed to pass costs on to consumers. The two have reported losing billions of dollars already because of soaring crude prices.

In other words, China is not having a supply or a demand problem right now, what they are having is a 'losing money' problem because of the current high costs - and because China price fixes their fuel, they must price fix it relative to the global market.

Long term I think everyone recognizes that China's demand is going to go up, but right now supply and demand isn't the issue - there are no supply problems with China even with Iranian sanctions. Raising the cost of gas and diesel will insure that supply will go up because by any measurement - this is a fairly significant cost increase for fuel for the average Chinese citizen. Also worth noting, China has not cut back any orders for fuel from any of their import sources, so despite less demand in the near term China will be stockpiling rather than reducing supply.

So if China is reducing demand, why is Saudi Arabia ramping up supply?

Saudi Arabia’s state shipping company, Vela, is set to send 11 supertankers, totalling up 22 million barrels of crude oil, to the U.S. this month and next, an abnormally high number, shipbrokers and analysts said Friday.

“This is the first time in several years for Vela to hit the market with such volume-and in such a short timeframe,” Omar Nokta, managing director at Dahlman Rose & Co., told Dow Jones Newswires. “In 2011, Vela fixed 1 VLCC to the U.S. every other month.”

Vela wasn’t immediately available to comment.

According to the International Energy Agency, Saudi Arabia’s oil production rose to 10 million barrels a day in February, its highest in 30 years. The Kingdom is expected to continue to increase output in the coming months, the IEA said in its monthly oil market report published Wednesday.

I know what you are thinking... this is an effort to bring fuel prices down and pick up the slack for Iranian oil cut off by sanctions and problems in South Sudan, but that simply isn't true. OPEC data shows that those problems were previously absorbed with other measures and they consistently claim the price for crude is artificially high. A lot of analysts continue to say that as well, and Bryan Walsh mentioned that specific point in his TIME column the other day.

Right now much of the recent price spike is due to tensions with Iran, a major oil producer. War with Iran is a real possibility, albeit an uncertain one, and if the missiles were to fly, we could easily see a price spike of $50 a barrel or more. So traders and major oil consumers are stockpiling crude now as a hedge against that very situation, which in turn drives the price up now by artificially inflating demand.

Emphasis mine. There is no supply problem. Because while margins are legitimately tight (they always are these days), it has been noted in several places including the Financial Times that there is a lot of hoarding of crude right now taking place globally, in particular Europe. Now we are seeing a "wall of ships" heading for the United States. It is being said that this is part of an Obama administration plan to bring the price of oil down, but that is hard to believe, because the Obama administration knows that isn't going to work. Shipping in more crude to the US isn't for the purpose of increasing supply on the market - rather increasing the supply in reserve.

Why does the Obama know that won't work? Because for the last few weeks politicians have had more than a few open discussions with experts on the topic and it has been specifically asked whether more crude in the US would reduce prices - and every expert has agreed it would not. The problem in the US isn't the supply of crude, it is the capacity of refineries.

With the East Coast poised to lose 50 percent of its oil refining capacity, three members of Congress on Monday worried that while the country is producing more of its own crude oil, it might grow more dependent on other countries for gasoline and diesel fuel.

Pennsylvania Congressman Pat Meehan hosted a panel of energy experts for a field meeting in Aston, Pennsylvania, of the Committee on Homeland Security.

Meehan and two other legislators, Congressmen John Carney from neighboring Delaware and Mike Fitzpatrick from Bucks County, Pennsylvania, peppered the experts with questions about fuel prices and logistics as well as national security.

Two refineries in the Philadelphia area have closed in recent years, and a third is scheduled to close this summer.

A massive delivery of crude from Saudi Arabia to the US - which is about to happen - is not going to impact fuel prices at all. All it does is add increased supply as a reserve, because refinery capacity is full and cannot actually use all this extra crude coming to the US. Said another way, we are hoarding supply, not for use to bring prices down (which is impossible without more refineries), rather to have in case of delivery disruption.

Then you have the rumors that the Obama administration is going to release from the Strategic Petroleum Reserve to help address fuel prices. I don't believe it, rather I think the idea is being floated to calm investors. Every time they are asked, the International Energy Agency (IEA) says there is not need to release stockpiles because there is no supply crunch.

So why are the big energy importers in Asia, Europe, and the US hoarding crude supply? Why is the US suddenly shifting naval resources to the Persian Gulf specific to capabilities of Iran? Isn't a massive delivery of Saudi Arabian supertankers to the US at a time we lack the refinery capacity to actually use all that crude quickly exactly what stockpiling for war looks like?

I think it is a frightening thought what is going on, only because of what I believe these events are telling me as an observer. The sanctions on Iranian oil are in place. It will take a bit of time, likely 3-6 months, to get a feel whether they are working or not. During that 3-6 months period, it is extremely unlikely anything is going to happen, except that production is going to get very high and everyone is going to stockpile around the world.

So tell me this. What is the intelligence assessment of major oil importers telling those nations political leaders in the US, China, and Europe about what Israel is likely to do if it becomes clear the oil sanctions against Iran - said to be the most potent type of sanctions - aren't working?

I don't care what the folks in Tehran are saying publicly, there is no way they are oblivious to what the tea leaves are suggesting is going on. The Obama administrations diplomatic moves have begun ahead of negotiations with Iran, because the precautionary actions the US would need to take ahead of war with Iran are being taken and written daily in plain sight of major newspapers for all of us to see.

The media can claim this is the Obama administrations grand plan to bring down gas prices, but since the Obama folks know they can't actually saturate the market due to lack of refinery capacity - I reject the popular media rhetoric that this is just Obama administration politics. At no point in the last 3+ years has the Obama administration demonstrated their plans are stupid and are designed knowing that failure is the result. If the Obama administration is involved in hoarding supply on supertankers from Saudi Arabia, it is being done so they are damn sure they have that stockpile when they need it.

Keep in mind, the only legitimate reasons the US would need that extra supply is if the economy suddenly shoots off like a rocket over the next 6 months (very unlikely) thus demand increases significantly, or if the supply chain is disrupted. Which do you think is more likely?

If I'm off base here, I'm very happy to be wrong. Hard to ignore what's happening though.