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Come On Kids, Play Nice

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The schoolyard squabble is gaining participants as Russia, NATO and the U.S. square off over Russia's military gambit into Georgia. The opposing sides are already past the name calling and have escalated into idle threats. Hopefully it will not progress into trading punches because we don't have a credible hall monitor handy to send everyone to their rooms.

The increasing hostility between NATO and Russia finally caught the attention of oil traders if you believe the mainstream press. Crude prices rallied +$6 after NATO broke off relations with Russia until they leave Georgia and return to the positions they occupied before the incursion. Shortly thereafter Russia broke off relations with NATO saying there would be no further military cooperation with NATO and called home their ambassador to NATO, Dmitry Rogozin. Three NATO warships sailed into the Black Sea on Thursday for what NATO said was long-planned exercises and routine visits to ports in Romania and Bulgaria. I guess it was just a coincidence they followed several Russian ships headed for Georgia. 

The escalating tensions were further fueled by another warning from a Russian general that Poland had opened itself up to nuclear attack by signing an agreement with the U.S. on missile defense. The U.S. signed the agreement with Poland on Wednesday to place a U.S. missile defense base just 115 miles from Russia. The signing of the agreement was followed swiftly by more warnings from Moscow. Russia issued its sharpest warning yet claiming the base was aimed at Russia and hinted at a military response if the base was ever put into operation.

Condoleeza Rice dismissed any suggestion the missile defense interceptors represented a threat to Russia. Washington says the site is to protect Europe and the U.S. from the possible threat of long distance missiles from Iran. Rice said the threat from Moscow regarding a military response was evidence Russia was losing credibility in the world. Here is the tag line that escalated the tensions. "It's also the case that when you threaten Poland, you perhaps forget that it is not 1988," Rice said. "It's 2008 and the United States has a ... firm treaty guarantee to defend Poland's territory as if it was the territory of the United States. So it's probably not wise to throw these threats around."  Is that an implied threat from Rice? Sure sounds line one.

Hours after the signing, Russia's Foreign Ministry contended that the U.S. system "will be broadened and modernized." "In this case Russia will be forced to react, and not only through diplomatic" channels, it said without elaborating.

Come on kids, play nice. Nobody wants to return to the cold war and definitely not a hot war. Put your egos back in your pocket and lets go have a beer.

The escalating tensions added what analysts said were about $10 in risk premium to the price of oil over the last week. The problem stems from Russia being the number two global producer of oil. They have also shown they are not afraid to use it as a tool to get what they want. Lately that has been higher prices for their oil and gas they supply to Europe. They supply about a quarter of Europe's oil and half its natural gas. Russia has already said they would not allow the BTC pipeline in Georgia to reopen and that accounts for 850,000 bpd of non Russian oil. BP has said the pipeline will be back in operation next week so we are heading for another showdown there.

If they succeed in keeping the BTC pipeline offline it would be a major blow to global oil supplies. However, since the U.S. and Europe have a vested interest in the BTC pipeline it would take a major decision on the part of Russia to attack it again. That could lead to a shooting war where NATO takes up sides against Russia and you know the U.S. supplies the biggest portion of the NATO firepower.

Analysts are also worried that Russia may be signaling a greater willingness to take back those breakaway countries and their energy assets. There are a lot of "stans" supplying the world's oil and analysts have always been afraid that Russia would exert military force to bring them back into the fold once peak oil arrived.

The dollar fell again on Thursday and that pushed all commodities higher including oil. You have to wonder is it really the dollar pushing oil or oil pushing the dollar? Gold was up another $25 stretching its gains to $838 after trading at $780 last week. Natural gas extended its gains to three days and appears to be putting in a bottom at $7.85.

Friday should be interesting as we watch Fay emerge back in the Gulf after three days over Florida. The current track takes her almost directly over New Orleans and she is expected once she moves back over the warm water in the gulf. Any track around New Orleans puts the oil field in danger. A new tropical storm is forming about 750 miles east of the Windward Islands and forecasters feel it could develop into another named storm as it approaches Cuba this weekend.

Jim Brown

OptionInvestor.com 

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