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Schork Oil Outlook: Bears' Risky Middle East Game

Oil bears calling Iran’s bluff… or are they playing with fire?

Headlines out of Iran are as bullish as ever. A country that sits atop 1 in 10 barrels of the world’s proven crude oil reserves has reportedly started its first nuclear reactor… for peaceful purposes of course (wink, wink, nudge, nudge). Meantime, over the weekend the country unveiled a long-range drone (“Karrar”) which is designed to, as Reuters reports, provide Iran with “…the ability to make pre-emptive strikes against a perceived threat…”

However, the most troubling news that broke last week was that Iran’s gasoline imports for August might have dropped by half from the previous month and is down by 90% compared with year ago. The drop in imports is a result of U.S. and E.U. sanctions that are designed to persuade Iran from pursuing its nuclear ambitions.

Thanks to geographical dumb-luck, Iran is situated over a significant amount of the globe’s easily obtained oil, but owing to ideological obtuseness it is still a backwater. Iran might be on its way to developing nuclear technology (and then weaponizing it), but it still cannot even refine enough of its own crude oil to sate internal demand.

Instead, the mullahs rely on international trading and marketing companies (Glencore, Vitol, Trafigura et al.) to buy their oil and then sell it back to them in the form of gasoline. Some estimates have these companies supplying 2 in 5 gallons of Iran’s gasoline. Sanctions in the West now target Iran’s trading “partners,” hence their reluctance to continue business as usual.

Furthermore, given Ahmadinejad’s well documented rhetoric regarding its looming annihilation, Israel over the weekend said Iran’s fueling up of its first nuke was “totally unacceptable.” Therefore, time appears to be running out. How long will Israel sit by? How long will Iran wait before it provokes Israel or lashes out at Iraq (to divert attention from civil strife that a lack of motor fuel will almost certainly cause)?

Thus, the Middle East is a powder keg, now more than usual. Yet, Nymex oil dropped 2.6% to finish the week at the lowest low since the U.S. 04th of July holiday. That is a far cry from 2005, (Ahmadinejad’s first year in office) when all Mahmud had to do was look cross-eyed at some reporter from the BBC and oil prices would jump by $2.

As written in today’s issue of The Schork Report, oil’s downtick in the wake of the geopolitical headlines is bearish. It is a risky bet, but it is mostly likely the correct one.

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.