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Energy Source with Sharon Epperson

  Tuesday, 1 Jul 2008 | 3:18 PM ET

Cheney And Iran: A New "Casus Belli" for The VP?

Posted By: Kenneth Stier
Iran
Iran

Those red-blooded investors--perhaps speculators positioned to profit from oil prices going even higher and maybe spoiling for a conflict with Iran--should consider U.S. Defense Secretary Robert Gates’s comment on the consequences of a U.S. strike against Iran.

"We’ll create generation of jihadists, and our grandchildren will be battling our enemies here in America,” Gates told the Democratic caucus at a Senate luncheon, according to a participant.

‘We’ll create generation of jihadists, and our grandchildren will be battling our enemies here in America,” he told the Democratic caucus at a Senate luncheon, according to a participant. A U.S. strike against Iran might seem unlikely, but Vice President Dick Cheney is in hot pursuit of a “casus belli” to start hostilities, according to an article carried in the July 7 issue of the New Yorker magazine released yesterday .

The 6,160 word report by Seymour Hersh, the country’s premier investigative journalist, says this is part of the Administration’s to-the-hilt use of a significantly expanded covert operation against Tehran approved by Congress late last year; taxpayers’ tab: $400 million.

That money is aimed at destabilizing the religious leadership and is being channeled to a gaggle of unsavory ethnic groups (one of them, the Kurdish M.E.K. group has been on the State Dept.’s terrorist list for more than decade; another has links to Al-Qaeda and may be running drugs, etc.) who are stepping up attacks inside Iran.

One recent target, a cultural center in the southern city of Shiraz, where at least 12 were killed and more than 200 injured. Since none of these dissident groups has much support inside the country, these are just irritations for the regime, which is probably strengthened by public revulsion.

More serious are U.S. Special Operations raids into Iran, to seize Iranian Revolutionary Guards and then spiriting them back to Iraq for interrogation or the pursuit of other “high-value targets.” These have the potential for provoking the regime into more direct attacks against the U.S.

That seems to be just what Cheney wants, according to this article, and it may come in the form of a Tonkin Gulf-type incident; this time in the Persian Gulf. That almost happened in early January when the Pentagon reported five Iranian patrol boats menaced U.S. warships in the Strait of Hormuz with threats to “explode” them.

President Bush called the incident “provocative” and “dangerous” but the U.S. naval commander in the region downplayed the incident pointing out that the U.S. regularly interacts with the Iranian Navy (and the Revolutionary Guards). “I didn’t get the sense…of being afraid of these five boats,” said Vice-Admiral Kevin Cosgriff.

Within a week the Pentagon acknowledged it couldn’t positively link the menacing radio transmissions to the Iranians and reports pointed the finger at a prankster (can’t be tracked down?) in the region with a history of sending fake messages. “Nonetheless, Cosgriff’s demeanor angered Cheney,” according to a former senior intelligence official, cited by Hersh.

“But a lesson was learned in the incident: the public had supported the idea of retaliation, and was even asking what the US didn’t do more,” writes Hersh. This despite a November poll in which 73 percent of Americans supported diplomacy and economic actions against Iran, not direct military action, which was favored twice as often by Republicans versus Democrats.

A few weeks later, Hersh’s intelligence source (unnamed) said a meeting in Cheney’s office was convened where “the subject was how to create a casus belli between Tehran and Washington.”

In the last few days Reuters has been reporting that Iran would “impose controls” on shipping through the Hormuz straits if it were attacked, but let’s be real – if there is major hostilities, Tehran would be looking to shut down the Straits (through which 40 percent of the world’s crude flows) and maybe even lob missiles into Saudi oil fields.

There is not much doubt they are quite capable of this. (More on this another time.) So, speculators, or whoever may be thinking attacking Iran could be a profitable cakewalk, well, be careful what you wish for.

It is also time for more bureaucratically brave brass--such as Admiral William Fallon, former U.S. Central Command commander, who resigned under pressure in March after publicly airing misgivings about attacking Iran--to stand up to the administration’s hawks (most of whom, like Cheney, have never served in the armed forces) that they have already done enough damage.

Questions? Comments? energysource@cnbc.com

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  Wednesday, 25 Jun 2008 | 12:51 PM ET

Shorting Oil The Way To Go?

Posted By: Sharon Epperson
CNBC.com

I'm hearing that a very large energy trader--one of largest, actually--took a huge short position yesterday in two oil ETFS; Energy Select Sector SPDR and Oil Service HOLDRs and he's added to those shorts as this market sells off this morning.

A smart move as XLE was down $2 at the lows and OIH fell $6 earlier today after the Energy Department surprised the market by reporting crude supplies rose 800,000 barrels when the consensus estimate was for a decline of 900,000 to 1.7 million barrels. The fact that distillate supplies also increased by nearly 1 million barrels more than expected is also seen as bearish for prices

Energy analyst Andy Lipow points out that "this week's refinery distillate production was an all time record surpassing the previous high produced the week ending July 1, 2005 which was prior to Hurricanes Katrina and Rita. Distillate inventories have increased nearly 14 million barrels or 13% since May 2, 2008." And he expects those increases to continue.

Now traders are just waiting for the Fed. No change in interest rates is expected, but strong commentary about inflation, rather than recession, could boost the dollar and pressure energy prices. Watch the $132-mark, that's a key support level for crude oil, which has traded between $131 and $139 a barrel for the past two weeks. With oil already down over $4 with just 2 hours left in the session, floor trader Anthony Grisanti says "a recovery is unlikely."

Depending on what the Fed says, the sell-off could accelerate this afternoon.

Questions? Comments? energysource@cnbc.com

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  Friday, 20 Jun 2008 | 4:35 PM ET

Saudi and China Make Biggest Impact On Oil

Posted By: Bertha Coombs

WITH FRIENDS LIKE THESE....

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  Friday, 20 Jun 2008 | 9:53 AM ET

Saudi 's Oil Fields on Viagra?

Posted By: Kenneth Stier

Saudi Arabia has long been the world’s preeminent oil producer and the kingdom’s royal rulers want to keep it that way.

But there is another possible narrative to the kingdom’s likely future – and ours too - which is far less comforting.

Rather than a petroleum stud with enough hydrocarbon juice to carry the world gradually into some kind of greener, post-petroleum energy era, Saudi Arabia may be far closer to running dry than we realize, because of years of overexploitation.

The Saudi’s current production is “really equivalent to is putting an elderly man on steroids and entering him in a marathon,” says Matthew Simmons, an energy investment banker, better known for his book on peak oil, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy.

Even when they only produce half or a third of their peak levels Saudi Arabia’s giant fields (most discovered decades ago) still out-produce just about all rivals.

But that’s achieved through massive injection of seawater into fields to pressure oil to the surface. The problem, says Simmons, is “what that really does is primary, secondary and tertiary recovery all at the same time…[and now]…the sweep is almost done.”

“When they go [out of service] they are going to go out in a whimper.” That seems to be exactly what happened in Mexico with the giant Cantarell oil field.

Alarmed by declining production PEMEX, the state oil company, repressurized the field (consider it Viagra for oil fields), and was able to quickly bring production back to 2 million bpd. But soon afterwards the field was in steep collapse. “All the way up there was a general sense that basically they had licked old age,” notes Simmons.

More modest production can be sustained for many, many years. There have been periodic rumors about some Saudi fields having already gone bust.

But actual Saudi production levels are state secrets, or as Simmons says officials are “as silent as the Mafia.” But there is precious little transparency anywhere in the region. Reserves for all OPEC countries are believed to be overstated because they are the basis for determining each cartel member’s export quota.

Considering how much the global economy depends on Saudi’s oil (the US sources 14 percent of its oil from the kingdom) this is a shaky (or sandy) foundation to depend on.

For that reason, Simmons suggests one of the most important results that could come from this weekend’s meeting in Jeddah is to get a commitment from their hosts to provide reliable production and reserve information – as are required by investor-owned oil companies.

The Wahhabist royals may prefer to keep their cards under their thobes, all the more reason for the rest of us to be clear-eyed about the risk of such obscurantism in such a vital commodity.

That applies to plans to open up ‘new’ fields, such as the $11 billion Khurais project to be online next June. It’s basically the last of the best fields but it’s not exactly new, and the reason it was not produced before is the formidable technical challenges it poses.

Now the Saudi’s think they have a solution: a 980-kilometer long pipeline to carry seawater to create an artificial aquifer with which to provide the necessary pressure. Simmons says this is “rolling the dice” because misplaced wells could “bury the field with brine.” After Khurais, there is just one more major project: the $9 billion Manifa heavy oil offshore field.

“After that the King has said very prominently that they will leave the rest of the oil in the ground for their grandchildren,” says Simmons approvingly.

But by then there may be paltry little left for Saudi’s next generation – or for any of the world’s grandchildren.

Questions? Comments? energysource@cnbc.com

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  Thursday, 19 Jun 2008 | 3:03 PM ET

Big Oil Heads Back To Iraq

Posted By: Sharon Epperson

Exxon Mobil , British Petroleum , Royal Dutch Shell and Total are reportedly near a deal with the Iraqi Oil Ministry that will grant the oil giants "no-bid" contracts for access to the country’s oil fields. This will mark the first time these firms have had commercial access to Iraq since the U.S. invasion in 2003.

But don’t look for the entry of the oil majors into Iraq to help depress oil prices that have surged over $130 a barrel. Energy analyst Greg Priddy of Eurasia Group points out that these are short-term service contracts of one or two years being awarded to the four Western oil firms, not production-sharing agreements.

Big oil isn’t booking more reserves from Iraqi oil fields, where current production is around 2.5 million barrels per day. Instead, the major oil giants will be helping to rebuild devastated energy infrastructure in Iraq, hoping to get a upper-hand on bids for future contracts.

"That’s important symbolically, but not practically" for the global oil market, says Christ Edmonds, founder of FIG Energy Partners. "No one is going to flip a switch and see oil gushing out of Iraq… pragmatically that may take years."

»Read more
  Wednesday, 18 Jun 2008 | 3:54 PM ET

Oil Supply Disruptions Are The More Immediate Concern

Posted By: Sharon Epperson

Even if Congress agrees to lift the moratorium on offshore drilling (a long-shot, for sure), getting that oil into the market will take years. Addison Armstrong, Tradition Energy's director of energy research, estimates it will take 10 years--at a minimum--to get 1 million barrels/day of oil moving from fields in the Arctic National Wildlife Refuge.

With anticipation mounting over this weekend's oil summit in Saudi Arabia, the White House now says it doesn't expect the Saudis to announce a supply hike. So doesn't look like we're going to see a sizeable flow of more oil into this market for a while.

Meanwhile supply disruptions are a more immediate concern. Namely, Nigeria. A key oil workers union there says Chevron workers are ready to strike at "any time" as negotiations failed today. Chevron's daily output in Nigeria was 350,000 barrels last year, and there's a 250,000 barrels/day offshore field that was supposed to start production there this month. What's the likelihood that will happen if Chevron workers are on strike? More important, the country produces the light, sweet crude the world is demanding. We need Nigerian crude to make gasoline -- though gasoline demand here has been waning.

Yet falling supplies--not slack demand--are the focus of the oil bulls. Here in the U.S., oil supplies fell for the fifth week in a row; a decline of nearly 25 million barrels in the past month.

»Read more
  Tuesday, 17 Jun 2008 | 9:15 AM ET

Playing Energy? Natural Gas Is Now The Place To Be

Posted By: Sharon Epperson
Natural Gas
Natural Gas

We had a technical reversal yesterday, where prices shot up to nearly $140 a barrel a few minutes before Nymex floor trading began, but closed 25 cents lower on the session and under $135. What a day!

MF Global energy analyst Ed Meir says today's action may confirm whether yesterday was really the intraday reversal that will take prices lower from here.

We're expecting more volatility today with the expiration of July crude options. And there's a great deal of open interest at $135 calls strike, but we'll see if prices get back there.

Crude oil, gasoline and heating oil are lower this morning but natural gas futures are bucking the trend. Natural gas prices are up over 70% so far this year, while crude is up nearly 40%. So if you want to play energy without the intraday volatility, for now , it seems natural gas is the place to be.

Questions? Comments? energysource@cnbc.com

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  Thursday, 12 Jun 2008 | 3:15 PM ET

Oil Prices: Volatility Like Never Before

Posted By: Sharon Epperson

All day we've been talking about the dollar as the key driver in the direction of oil prices today. As the greenback rebounded against the euro and oil fell over $4 at the lows of the session. But in the last hour and a half of trading, with the dollar still higher, oil erased most of its losses and looks poised to settle basically unchanged.

What's going on?

Yes, the market is concerned about Nigeria. Yesterday, we told viewers that Shell was extending force majeure on its Bonny Light terminal until the end of July. Today, with a strike looming among oil workers there, Nigerian union officials are saying talks with Chevron aren't going so well. Perhaps that news helped lift oil out its dollar doldrums.

Gasoline futures also turned around to gain nearly 2% on the day. There have been a number of refinery issues along the East Coast at Valero in Delaware City and Hess in Port Reading, NJ, but they didn't have a material impact on production. Perhaps traders were combining the snags reported earlier this week at Lyondell in Houston and Shell in Deer Park, IL. Also, Energy News Today is reporting: "ExxonMobil is seen requiring about 2 weeks of maintenance on a sulfur recovery unit at the 150,000- barrels-per-day Torrance, California, refinery near LA."

But the other impact on the market and the impetus for oil's whipsaw price action on a daily basis is somewhat intangible. Skittishness over proposal for more regulation on oil markets. Fear that prices at these levels could shoot for the moon... or drop like a rock. The result is unprecedented volatility.

Addison Armstrong, director of research at Tradition Energy, says fear is feeding both sides. The bulls try to push prices through $139, but when they get close they pull back. You can't be a convicted bear either because as soon as you do the market turns around.

The result, says Stephen Schork of the Schork Report, is a market that has basically traded in the same range between $131 and $139 for the better part of a week. Schork says: "All we did today was get to the bottom of the range and then after the lunchtime lull, the bids started coming in again and bears started to cover and that's taking us back to unchanged."

MF Global energy analyst Mike Fitzpatrick has been pouring over 10 years worth of data and says he can't find any time period where the volatility is even close to what we've seeing these days in the oil markets. A month or two ago, floor traders here at the NYMEX seemed stunned by $2-$3 oil price moves in a single session, now it appears $4 to $5 swings have become the new norm.

Questions? Comments? energysource@cnbc.com

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  Monday, 9 Jun 2008 | 3:45 PM ET

Will Higher Gas Prices Bring More Production? Don't Count On It

Posted By: Kenneth Stier

Rising oil prices should encourage more exploration and production, right? Not if you are Venezuela, Russia, or Iran. Just the opposite, says Goldman’s oil seer, Arjun Murti, who gave an infrequent interview to Barron’s that appeared in this most recent issue.

High prices mean these, and other key producing countries, don’t need the incremental revenue. They are getting plenty of revenue through price, they don’t need to get it through volume. It also means they have sufficient capital to develop their industry on their own. That leaves Western oil firms increasingly on the sidelines, unneeded, thank you very much. Witness the expropriation in Venezuela. Could more countries be tempted to follow suit?

Since the government calls the shots in many key oil-producing countries, there is even less chance they will respond to higher commodity prices, as market forces would suggest. “Logically,” notes Murti, “there is less incentive for Russia to massively grow their supply and bring down oil prices; frankly, that’s true for a lot of the countries.”

In effect, OPEC’s logic rules just about everywhere. And can we really blame them?

Iraq, too, is part of this, but by default. Only recently has Iraq been able to restore pre-war production to 2.5 million barrels a day; it’ll be another five years before this can be boosted to 4 million barrels a day.

Assuming there is enough stability to rebuild Baghdad will desperately need all the revenue it can generate, which lead to best efforts boosting production. But it is hardly inconceivable that Iraq will sometime calculate their national interest is to keep prices high. It will be another bitter reminder of the U.S.’s continued superpower erosion.

Meanwhile, our more market-driven economy is already responding to higher oil prices – with negative demand-growth for gasoline, which will soon squeeze refiners’ margins.

But even our huge consumption is not what it used to be. High oil prices are now being propped up more by non-OECD (vs. OCED) demand, and a major question is whether this demand will drop off. “The biggest risk is that emerging-market growth abruptly changes for some reason,” says Murti, who notes it will probably be sudden. “That’s what we worry about.”

Remember, Goldman does not subscribe to peak oil--but peak price. The prediction is for prices somewhere between $150-200 over the next 6-24 months, which translate into pump prices as high as $5.75 per gallon.

But peak price also suggests there will be a downside. It is worth noting that Goldman’s long-term forecast is for oil to fall back to an indulgent $75 per barrel. But that’s 20 years out.

Questions? Comments? energysource@cnbc.com

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  Friday, 6 Jun 2008 | 12:45 PM ET

Big Players And Big Oil Moves

Posted By: Bertha Coombs

Following Thursday's monster reversal on oil, a couple of equity traders sent me pretty skeptical e-mails saying "Seriously??!" Their take, the oil move is purely speculative, and they blamed the big players.

One of them pointed out that it came on the day that Rep. Bart Stupak said it's time to shore up the loopholes that have allowed big speculators to manipulate the energy market.

When a reporter asked whether he meant Morgan Stanley and Goldman Sachs, his response, "You said it, not me." Stupak underscored he saw no illegal activity by speculators.

But the Oil Conspiracy theorists got more ammunition Friday morning when Morgan Stanley analysts came out with a call on $150 oil by July 4th. Goldman had predicted by the end of the year. Morgan Stanley and Goldman's calls move the energy markets, and both are focused on fundamental global oil supply constraints. Ole Slorer & company at Morgan Stanley say there are no signs of demand destruction in Asia, and that in fact, Asia continues to take an unprecedented share.

But, seriously, did that whole premise really change so dramatically in just four days???

MF Global's Mike Fitzpatrick is skeptical: "The signs we have been chronicling all week seem to be unmistakable that demand is already beginning to contract. Economic history shows that fundamentals usually win, in the end. But that is the rub....in the end; we all have seen innumerable examples where emotion can carry a market quite far and this may just be another example."

Blame The Central Bankers
And then there's Ben, Jean-Claude and the Greenback. Ben Bernanke's unprecedented defense of the dollar helped the oil bears argue that we had put in a top, sending the dollar higher and WTI eyeing $120. But what Ben giveth the dollar, Jean-Claude Trichet taketh away. $120 before $130 was not to be. The shorts got squeezed like Orange Julius Original smoothie.

Alaron's Phil Flynn takes aim at the Frenchman in his note today: "Mr. Trichet basically said sorry Ben the dollar is your problem and don’t look to Europe to help you out. In fact, look for Europe to squeeze you because we are raising rates to squeeze you and drive you into recession because we are in better shape to handle it.

Trichet is saying damn the dollar. It is not right to use monetary policy to support a currency or to influence oil prices even if that currency is the world currency of all commodities. Why can’t he see that the dollar woes are adding to the costs of oil?"

Add in hawkish comments from Israel this morning, about an attack on Iran's nuclear facilities being "unavoidable," another dollar swoon on the back of the employment report, and the Morgan Stanley call and it was off to the races this morning. As one floor trader put it, "it got ugly fast."

It's feeling feeling overbought here....but given the frothiness, I would not bet on $120 before $150. Then again, I wouldn't bet against it either.

Questions? Comments? energysource@cnbc.com

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