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TGIF February 24, 2012

By February 25, 2012Weekly TGIF

The price of Oil continues its ascent, with West Texas Crude (WTI) now above $108, having risen $10 a barrel in 2012 already. European Brent Crude, which has maintained a premium to the US for years now, is above $124. Importantly, 2/3 of global oil is priced in Brent.

The drivers in the rise of oil prices are a combination of improving economic growth, led by the US and Asia, as well as growing tensions with Iran . U.S. officials have said they’ve seen no evidence to revise their judgment that Iran continues to only enrich uranium at low levels, and don’t present an immediate nuclear threat. Iran has stated all along they are using nuclear technology to generate alternative energy sources to oil. Senior U.S. officials have said that Israel does not dispute the basic intelligence or analysis. But what’s critical to understand is Israel has less patience, and a much lower threshold for action than the US and the rest of the world on this subject. This tension isn’t likely to go away quickly.

China , India and Japan are planning cuts of at least 10% in Iranian crude imports as tightening US sanctions make it difficult for the top Asian buyers to keep doing business with Iran . These 3 countries account for nearly half of Iran ‘s crude exports. The US has not bought oil from Iran since 1979. If you recall, the US implemented sanctions at the beginning of this year that will punish financial institutions that deal with Iran ‘s central bank, the main clearing house for oil revenues, by shutting them out of US markets.

Currently, Iran is producing the lowest amount of oil since 2002, just over 3 Million Barrels per day. These sanctions could cost Iran around $35 billion in oil export revenues. 80% of Iran ‘s economy is driven by oil, so this is really hurting them. Supplies can be made up to meet the strong demand from other sources. But the risk of Iran doing something drastic, like shutting off the Straits of Hormuz, where 20% of global oil passes on a daily basis, remains high.

One of the keys to our future is securing safe and stable energy sources at home. With technological advancements, we now have the ability to be independent from foreign oil, with major discoveries of both oil and natural gas under US soil, while we continue to innovate renewable sources as an alternative to fossil fuels for a brighter future. For the time-being, the world still runs on crude so we are subject to these types of risks, and oil producing nations know it. This is the highest oil has ever been this early in a year, and doesn’t bode well for gas prices which have already moved over $4 in the Bay Area. High gas prices are always a threat to the consumer and the global economy.

We are on top of this issue and these threats, and have measures in place to hedge against a continued rise in the price of oil. We stated in our Winter Newsletter that we see WTI at $120+ at some point this year. It’s on its way. Have a nice weekend.

By: Mike Frazier