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Playing With Fire

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The world is moving ever closer to a real confrontation with Russia and most people don't even know it. The West along with many NATO countries have been very vocal about punishing Russia for its foray into Georgia and up until now Russia has been fairly quiet. Several events on Thursday suggest those taunting Russia and talking about sanction may have bitten off more than they can chew.

When you play with matches it is almost inevitable that you will eventually get burned. The NATO countries, spurred forward by the West and the European Union have threatened sanctions against Russia if they don't return the two breakaway countries to the state they were before the conflict began. In response Russia may be preparing to cut off oil supplies to Germany and Poland as early as this weekend in retaliation according to an article in Britain's Daily Telegraph. 

Stratfor reported Russian President Dmitri Medvedev flew to Tajikstan on Wednesday for a summit with China and four central Asian countries who were previously members of the former Soviet Union. The meeting had been scheduled for some time but it took on more significance given the talk about sanctions by the EU. It is unclear to what length Russia will go to rebuild the former Soviet Union and bring all the breakaway states back into the fold but Russia does appear headed in that direction and they are not bashful about using their wealth of oil and gas supplies to do it. 

Russia also warned NATO about a possible confrontation between Russia, NATO and the West in the Black Sea. Vladimir Putin called it a potential flash point for conflict with the NATO and warned about any further warships entering the Black Sea. He warned there could be direct confrontations should NATO or its member nations increase their presence in the area.

There are currently four NATO ships in the Black Sea on a previously scheduled exercise called Active Endeavor. Putin also explicitly warned that there could be consequences if additional vessels belonging to NATO countries but not under NATO command were to attempt entry. For instance a British or American warship not under NATO command. Putin basically posted a "Keep Out" sign on the Black Sea and that may not go over well with the West or those NATO countries. Nobody likes to be told you can't go anywhere and in the case if the U.S. they tend to test those restrictions very quickly just to prove their dominance of the seas. They do it against China all the time.

Russia is the second largest oil producer on the planet and in the top five gas producers. Most of Europe is hostage to the Russian supplies and Russia has doubled the prices over the last two years and turned off the supplies when the countries protested. Russia understands the power of oil and is not afraid to use it as a weapon. This Georgia skirmish is taking on all the appearances of the beginning of a bigger problem. What better time for Russia to make its moves than with America tied down in Iraq, Afghanistan and with a lame duck president and the final stages of a political campaign? You can bet this skirmish has been planned for sometime. 

On the home front Hurricane Gustav is still heading right for the oil patch and oil companies are abandoning ship at a frantic pace. Shell has evacuated 400 workers and will bring in 270 more on Friday. BP said it was removing its personnel from the region and making hurricane preparations. Exxon said it was evacuating personnel and bracing structures for high winds and heavy rain. Transocean evacuated 190 workers from five of its 11 drilling rigs in the gulf and will be removing more. They have over 1550 workers in the gulf. Planalytics said as much as 80% of the gulf's production could be shutdown by Saturday night. The storm is moving slowly north and now is expected to be directly over the oil patch at 8:PM on Monday. This is about 12 hours later than previously predicted.

Gustav Storm Track


A second storm, Hanna, has formed off Puerto Rico and is expected to be off the east coast of Florida by early Wednesday. It is expected to reach hurricane force by Saturday. Hanna is not expected to impact the gulf unless it takes a sudden turn westward like Katrina did from this very spot in 2005.

Wind Speed Projections for Gustav and Hanna


Crude prices rose over $117 again Friday morning but are struggling to hold this level. With Gustav not expected to hit the oil patch until late Monday the incentive to be long over the weekend has evaporated. Traders will still have plenty of time to get long on Monday morning if the storm has increased in intensity and is still heading for the oil patch.

Jim Brown

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