HAS OIL FINALLY REACHED THE TIPPING POINT?
by Joe Duarte, MD
Joe-Duarte.com & IntelligentForecasts.com
July 17, 2008

Editor’s note:

On the Financial Sense News Hour (July 12, 2008) Dr. Duarte and Jim Puplava discussed the fact that something dramatic was likely to happen in the next few days. Dr. Duarte was particularly concerned about the volatility in the oil markets, and mentioned to Jim that such drastic moves, as had been seen in oil, were often preludes to trend changes.

Since then, the price of oil has come off nearly 10% as of July 16, 2008. To be sure, there is no guarantee that this is the top in crude. Yet, on July 17, 2008, Dr. Duarte put forth a plausible scenario for such a top.

On July 10, Dr. Duarte followed up with a second and very pertinent article titled “Iran Contra: Bush Style?”

Here, both articles are presented together.

Crazy Times Call For Crazy Actions (Originally published on July 7, 2008 at www.joe-duarte.com.

The talk is heating up as much as the price of oil these days, making us wonder if a top in crude is near. Of course we've wondered this many times, and have been as wrong as anybody else. Yet, for some reason, the current rhetoric and activity seems to have something more to it.

Sure, it could be the Texas heat, or the heat daze being caused by the (chuckle) riveting presidential campaign. Or maybe it's the lack of Medicare payments that we've experienced in our other life over the last month.

Still, with crude prices hovering above $140 and lots of Chicken Little activity in evidence, considering the contrarian thesis about oil is worthwhile..Dontcha think?

Let's start with OPEC, whose president Chakib Khelil was interviewed over the weekend in the Algeria-News. Mr. Khelil's main focus seems to be the weakness of the U.S. dollar, as he noted the following: '"The price of oil will rise again in the coming weeks. We have to follow the evolution of the dollar, because a one percent fall in the dollar means four dollars more on the price of oil."'

He also noted that the current rise in prices was in "nobody's" best interest and that supply was currently in "balance," while noting the ongoing crisis between Iran and the West with regard to the former's nuclear program as contributing factors to the rise in oil.

Over the weekend, Iranian officials again threatened to close off the Straits of Hormuth in retaliation for any military attacks on its nuclear program.

Yet, the price of crude was falling in very early trading on Monday, despite the laundry list of reasons for prices to remain high.

In fact, what's driving up the price of crude, more than anything else, according to some in the industry, is the demand for low sulfur diesel fuel. Here, as everywhere else in the system, much of the problem has to do with the limited supply of low sulfur light sweet crude, which gives the highest yield of the highly sought after low sulfur diesel fuel.

According to Bloomberg, gasoline demand has fallen, due to higher prices at the pump. Thus refiners have actually decreased gasoline production, and have shifted to diesel production in order to improve their falling profit margins.

Indeed, some are calling for a release of some of the light sweet crude in the U.S. Strategic Petroleum reserve as a way to cool off the markets, an event which theoretically could come in the next few days if it was to come at all.

John Berry, a Bloomberg columnist penned the following: "It's not hard to make a case that the current situation is economically threatening. The country was coping with the collapse of the housing industry and the related financial market turmoil before crude prices took off. Now we have a triple whammy, which, among other things, is doing great damage to the auto industry by killing sales of sport-utility vehicles and pick-up trucks."

Conclusion

Hot and heavy talk from OPEC's president, and the built in expectations of the market that oil has nowhere to go but up, suggest that prices are vulnerable to external events and suprises.

With all the bidders already lined up on the buy side, there is the potential that the market is now out of balance, ie. that all the buying that was worth noting is in and that the sell side may be close to gaining an advantage.

To be sure, this is a way outside the box argument, and there is no way to know if we're on the money or not. Yet, it seems plausible given the extreme bent of the market on the notion that prices can go nowhere but up from current levels.

What are we saying? If the U.S. opens the strategic oil reserves, we could see at least an intermediate term top in crude. What's the worse case scenario? A $10 to $20 drop that lasts a few hours to days, and a rapid rise back above $140.

And the potential for failure is what could be keeping the U.S. government from tapping SPR. But what the heck? Nothing else seems to be working.

Besides, these are not normal times. Just ask Roger Federer and Rafael Nadal if anything is impossible these days.

Iran Contra: Bush Style?

By Dr. Joe Duarte (Originally posted on July 10, 2008 at www.joe-duarte.com/

Report: While The Missiles And The Taunts Fly..Behind The Scenes They're Talking..And Making Big Deals

The price of oil fell for two days running because the U.S. and Iran are having secret talks and one of the agreements is that neither side would let the price of crude oil rise above $150 per barrel, says Debka.com.

In what Debka, the highly sensational, but sometimes accurate Israeli "intelligence" web site that some say is a propaganda arm for the Mossad, describes as "talks between the US and Iranian delegations, representing President George W. Bush and Iranian supreme ruler Ayatollah Ali Khamenei," several key, yet "ad hoc" agreements have been reached.

Citing the inevitable "exclusive Gulf and Iranian sources" Debka reported that the U.S. has been "leaking" information to the media as part of its agreements with Iran, and thus keeping Israel from attacking Iran. Of course, as usual, nothing is set in stone and "neither nation has sheathed its military option" as the "understandings are ad hoc and could well break down in the volatile climate generated by hard-line elements of Iran’s Revolutionary Guards, which are dead against deals with Washington."

And if you're looking for more interesting stuff, try this. Debka says that Iran has played a significant role in the U.S.'s ability to make inroads against Al-Qaeda in Iraq, as "Tehran ordered Iranian intelligence officers working undercover in Iraq to halt attacks on US troops by pro-Iranian militias, including Moqtada Sadr’s Mehdi Army," a fact that "has left US and Iraqi government force with free hands for large-scale operations against al Qaeda."

Furthermore "Iranian officers are also sharing useful intelligence on conditions in the field with American commanders," as the purpose of the excercise is "the Bush administration’s ambition to help fellow-Republican Senator John McCain get elected to the White House."

And to back that claime, "DEBKAfile’s Iran experts comment that the revolutionary regime in Tehran has traditionally preferred a Republican over a Democrat in the White House since the days when its founder, Ayatollah Ruhollah Khomeini, helped Ronald Reagan defeat Jimmy Carter." According to Debka, some of the agreements reached between Reagan and Tehran are still in place, and the White House is making use of them.

Conclusion

As far fetched as it sounds, this is plausible. After all, Iran-Contra did happen, and it happened with a Bush in the White House, albeit as the Vice President. And it is known that the U.S. and Iran have been having both up front as well as behind the scenes talks for years.

More important, the plausability of the scheme also fits the way the two day mini crash in oil happened, seemingly out of nowhere, just as things happen when a big hedge fund has to meet a margin call and sells big positions in a hurry.

Third, Debka also makes another interesting point that makes sense. Since these talks have supposedly been ongoing for some time, during which the situation in Lebanon, in which Iran and Syria have a big hand, have also calmed down.

So, if Debka is correct, the U.S. has had a big turnaround in the way it views Syria and Iran, and the repercussions of such a development, if indeed it is true, will be significant.

According to Debka, citing a Saudi source “A US-Iranian earthquake is rumbling under the surface of the Middle East, especially in Syria.”

© 2008 Joe Duarte, M.D.
Dr. Duarte's Bio and Archive

Joe Duarte M.D. is founder and Editor in Chief of Joe-Duarte.com. Dr. Duarte is a board certified anesthesiologist, a registered investment advisor, and President of River Willow Capital Management. His latest book is “Trading Futures for Dummies.” He is author of “Futures and Options for Dummies” and “Successful Energy Sector Investing.” Dr. Joe Duarte’s Daily Market I.Q. is a subscriber service that provides daily intelligence, trading strategies, and technical analysis at www.joe-duarte.com.

Dr. Duarte is one of CNBC's original Market Mavens. He has logged many appearances on the network. Financial Wire syndicates his commentary. He has contributed articles to MarketWatch.com and has been quoted in The Wall Street Journal, Barron's U.S.A. Today. He lives in Dallas, Texas.