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AIG Bailout Pushes Oil Higher

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I know it sounds crazy that the bailout of AIG would have anything to do with oil but as I explained yesterday there was no problem with oil. It was a liquidity problem with banks, funds and institutions. With the financial system collapsing those entities were selling everything with value to raise cash. Now that it appears the total system meltdown an AIG failure would have caused has been averted there is no reason to sell.

The price of oil rose +3.50 after Bloomberg leaked a story about the government bailing out AIG. Oil prices had declined to $90.50 intraday. As of 2:30 ET on Wednesday the price has risen to $94.50. Support has been tested and most analysts expect oil and commodities in general to come back into favor.

John Hofmeister, the former president of Shell Oil and one of the most influential voices in the oil industry, called for short term gasoline rationing for the next six weeks. The problem continues to be the refinery outages around the gulf. While most of the refineries only sustained minor damage the majority will not be back online for 10-14 days or longer because of power issues and cleanup.

Gasoline inventories are running dangerously low and it could be four weeks before full production is moving through the pipelines. Prices have already risen sharply on the east coast and the gulf as stations run out of gas. It is going to get worse.

The weekly inventory report on Wednesday is definitely going to be a shocker. Oil inventories should have fallen substantially except that with all the refineries offline 25% of daily oil consumption by refiners is also offline. It will be a match between low imports and low refining. The loser will be drastically lower gasoline inventories because driving did not stop.

If the credit crunch is finally going to pass and commodities become attractive again we should see buying in oil return as news events point out our weaknesses. Nigeria is moving into an all out war with the MEND rebels and Shell just extended the force majeure on Bonny light crude.

The UN nuclear agency IAEA showed documents and photographs on Tuesday suggesting Iran is trying to modify a missile to carry a nuclear bomb. The IAEA said its investigation into Iran's nuclear program was at a dead end because Iran would not allow them access or information. The IAEA said Iran has been enriching uranium to levels in excess of normal A-plant fuel, has been testing high explosives with complicated high speed triggers needed to create a nuclear explosion and is modifying the nose cones of their long-distance Shahab-3 missiles suitable to carry a nuclear weapon. The IAEA released documents, diagrams and photos of evidence to support their claims. Iran dismissed the evidence as forged.

With the main 35-nation IAEA will meet next week and you can bet they will turn up the heat on Iran. At the same time Iran warned that they could bring oil shipments to a halt from the Persian Gulf if Iran was attacked. That would instantly push oil prices to $200 or higher. The U.S. is pushing to have additional sanctions put on Iran and there are still some analysts that believe the U.S. will strike Iran before Bush leaves office. We know McCain will not accept a nuclear Iran but Obama wants to sit down with Iran's fanatical president and talk him into dropping his nuclear program. We know how well that would work.

Jim Brown

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