Marcus Cake

There have been a few acquisitions of internet or technology companies at conventionally unjustifiable valuations. These have been the prominant aspect of a narrow technology boom (see .Net boom category). The price of oil and speculation in the oil market has, however, acted as a dampener on the extent of the technology boom. Higher oil prices have raised global growth concerns generally and speculative capital has been focussed on oil and resources. Speculation in oil has rewarded investors until recently. The recent “crash” in crude oil prices may reduce concerns about growth and speculative capital may look beyond oil investments. The technology boom is likely to gain further momentum as a result. I have extracted a few quotes to provide an insight the recent price decline and the delicate geostrategic and political balances in the market for oil. I encourage you to read the original article.

What’s behind the crash in crude oil?, marketoracle.co.uk, 11th January 2007

Extract:

• Is it enough to point the finger of blame for the latest crash in crude oil on the arrival of global warming? Unusually warm weather in Russia, Europe, and the United States, with temperatures reaching the upper 60’s in New York’s financial district, weakened global demand for heating oil by 23% below normal last week, and a 30% drop in heating oil demand is also expected in the days ahead.
• While the media focused on the balmy weather to explain the sudden 10% plunge of crude oil to as low as $55 /barrel on January 5th, what initially triggered the drop was a surprise move by Saudi Arabia to slash the price of Arabian Light, its finest blend, by $1.75 /barrel to a $7.50 /barrel discount to West Texas Sweet, for its US customers, the deepest discount in 10-months.
• Despite cheating by OPEC and record high Russian oil output, strong oil demand from Asia is expected to put a floor under crude prices at some point. Asia imports about two-thirds of its 24 million bpd crude oil needs, most of that from the Middle East. China surpassed Japan in 2004 as the world’s second-largest oil consumer after the United States. China consumed 7.4 mil bpd of oil last month, compared to US demand of 20.7 mil bpd, which was 25% of global oil demand.
• Beijing’s plans for its strategic oil stocks, whose capacity will reach 100 million barrels by 2008, will present more volatility for oil markets. The 33 million-barrel tank farm in Ningbo has been filled to at least one-third capacity with Russian and Middle East crude. The 30% fall in oil prices to $56 /bl might spur China into action.
• Iran is home to approximately 10% of the world’s oil and is the second largest exporter in OPEC, producing 3.8 million bpd. At the same time, Iran sits atop the world’s second-largest reserves of natural gas. Today, 85% of Iran’s export earnings, as well as half of its budget and a quarter of its economy is derived from energy exports. Despite oil exports of 2.5 million barrels a day however, Iran currently imports more than 40% of its annual consumption of gasoline from India, France, Turkey, and China, at an estimated cost of more than $3 billion annually.
• While apparently ruling out the military option for 2007, the Europeans and the US are quietly engaging in economic warfare with Iran, by demanding that international banks and oil companies to pull out of dozens of Iranian projects, including development of Iran’s two massive new oil fields Azadegan and Yardavan that could expand Iran’s output by 800,000 bpd over the next four years. US officials already have already warned that they will hold China accountable under Washington’s unilateral sanctions laws if Beijing proceeds with a $16-billion project to develop Iran’s North Pars gas field. Japan’s INPEX had secured the right to lead the $2 billion-plus development of Azadegan with a 75% stake, but pulled out of the deal in October under heavy US pressure.
• The Euro also gets support from some unsavory characters. Iran, the world’s fourth largest oil producer, “is calculating and receiving oil revenues based on Euros for the 2007 budget,” said government spokesman Gholamhossein Elham on Dec 18th. Most international banks have already stopped US dollar transactions with the Islamic Republic of Iran because of pressure from Washington.
• Israel cannot play Russian roulette and attack Iran, because its nuclear facilities are inhabited by Russian technicians, and Israel imports 60% of its oil from Russia. Because Israel has limited fossil fuels, its energy supply from Russia is of extreme importance for the functioning of its economy. Therefore, Ahmadinejad holds the trump card, while his chief ally, Russian kingpin Vladimir Putin controls most of Israel’s oil supply, and can bring the Israeli economy to its knees.
• With a stabilized crude oil market in the background, gold traders were free to focus on the plight of the deficit ridden US dollar, speculative fever in China for gold and red-chip stocks, and central bank diversification out of the US dollar, and into other currencies, including gold. The yellow metal had managed to climb to as high at 11.25 barrels of crude oil per ounce of gold last week, from 8.5 barrels in August.
• Can economic warfare succeed in toppling Iran’s Ayatollah Khameini before he gets the bomb in 2009? If US military intervention against Iran has been ruled out for 2007, the big question is whether Saudi Arabia is behind the latest plunge in oil prices, to wreck havoc on Iran’s budget and economy? Meanwhile, Iran is banking on strong demand for crude oil from Asia to put upward pressure on the price, and there will be plenty of jawboning from Ahmadinejad.