Potential oil Disasters



Sean Brodrick takes a closer look at the potential problems that could lead to disaster for the oil market. Mr. Brodrick discusses how war, hurricanes and refinery utilization could cause oil to hit the$200 mark.

According to a Rice University analysis of the link between prices of crude and gasoline, if oil reaches $200 a barrel, gas will be $6.64 a gallon. The world's producers are pumping flat out. Saudi Arabia just promised to raise production a little bit, but that reduces their spare capacity to almost nothing. There is no margin of error and no room for something to go wrong, but something always goes wrong.

The U.S. is edging closer to war with Iran. The Jerusalem Post reported that former U.S. ambassador to the U.N. John Bolton said that Israel is likely to attack Iran sometime between the November U.S. presidential election and the inauguration of the new president. Bolton also said that he does not believe the U.S. will participate in the attack. Israel may attack because Iran will not give up its nuclear development program and Iranian President Mahmoud Ahmadinejad has repeatedly called for the destruction of Israel.

However, in the U.S., CBS News reported that the Israelis are trying hard to get the Bush Administration to mount an attack on Iran's nuclear facilities. The U.S. Congress is debating a resolution that slaps new economic sanctions on Iran, proposes a blockade, and seems to open the door for military action. Ron Paul, the U.S. Representative who has long stood up against the Iraq War, calls the new bill "a virtual war resolution."

According to another Israeli news service, Iran has aimed its Shahab-3B ballistic missiles into launch positions, targeted squarely at Israel and Israel's nuclear reactor in the Negev city of Dimona. In addition, Iran says that if it's attacked, its Revolutionary Guards would mount attacks on shipping in the Strait of Hormuz oil route and oil facilities in Saudi Arabia could also be targeted. Two-fifths of all globally-traded oil passes through the Strait of Hormuz.

Hurricanes in the Gulf of Mexico are also potentially disastrous for oil. The National Oceanic and Atmospheric Administration (NOAA) predicted above-normal hurricane activity in its Atlantic Hurricane Season Outlook for 2008. NOAA projects 12 to 16 named storms will form within the Atlantic Basin, including 6 to 9 hurricanes, of which 2 to 5 will be intense during the upcoming hurricane season. Any direct hit on the Gulf of Mexico's oil and gas infrastructure could send oil prices soaring past $200 a barrel. The bad news is that the Gulf of Mexico is home to 20% of the natural gas and 30% of the oil produced in the U.S. and 40% of America's refining capacity. If that refining capacity gets taken out by a hurricane, it could leave the U.S. looking at $6 a gallon gasoline or higher very quickly.

With the rising cost of oil, America's refiners are keeping low inventories of crude and lowering their refinery utilization rates at the same time. According to the Energy Information Administration, gasoline stockpiles fell by 153,000 barrels to 208.8 million barrels just recently.

Refinery utilization, which normally hovers in the 95% range during the summer, is currently at just 88.6, its lowest level for early summer in 15 years. If refinery inputs are at 15.4 million barrels per day, a one percent change in yield is a 154,000 barrel-per-day change in product volume. U.S. consumption of gasoline is around 388.6 million gallons/day. Those few percentage points mean a real difference in supply, which means higher prices.

Meanwhile, the EIA reported the demand for motor gasoline has declined by an average of 9.3 million barrels per day down 2.1% from the same time a year ago and down 5% from its peak of 21.3 million barrels a day on January 4. This lessening of demand is the excuse the refiners use for the low run rates. Since American consumers are using less gasoline, they say they need to process less. But less supply drives up prices, so consumers use less gasoline; it's a vicious circle. While rising input costs have squeezed refinery margins, gasoline retailers are also seeing profit margins tighten to the vanishing point.

"In 2007, the average markup of gas sold at the pump was 14.3 cents per gallon over what the owner paid, according to data from the National Association of Convenience Stores, the trade group for the stores that run more than 80% of the country's gas stations. The profit, or net margin after all expenses have been figured in, has now shrunk to a measly 1.5 cents a gallon. Now, with the price of gasoline rising, charges for credit card transactions are rising as well, and many gas station owners are making no money at all. That's why Exxon, the most profitable company in the history of the world, announced in June that it is selling the 2,200 gas stations it owns," Brodrick states.

To read this issue online, please visit:

http://www.moneyandmarkets.com/Issues.aspxOil-Crisis-Worsening-Whats-Next-1926

About SEAN BRODRICK & MONEY AND MARKETS     

Sean Brodrick joined Weiss Research in 2000 as an analyst, bringing more than 25 years experience as a journalist and financial analyst to the position. He is Weiss Research's small-caps specialist, especially in natural resources, and is the editor of the company's Red-Hot Canadian Small-Caps, as well as a regular contributor to its daily e-letter, Money and Markets.

Previously, Mr. Brodrick was the investment director of The Sovereign Society, the world's leading publisher of offshore asset protection strategies and global investment opportunities.

Recognized for his expertise on Canadian and Australian investment opportunities, Mr. Brodrick has been featured on many financial talk shows, including CNBC Squawk Box and Bloomberg Market Line. He is a weekly guest on Market Matters Radio, a contributing columnist to MarketWatch.com and a frequent commentator on one of Canada's premiere financial websites, HoweStreet.com. His report, "70 Days to Empty," has garnered acclaim for its analysis of the forces pushing America toward its next oil crisis and was described by

The Daily Reckoning as "the most important report you're likely to read this year," while his knowledge of uranium has helped investors earn solid gains on the commodity.

Mr. Brodrick holds a B.A. degree from the University of Maine.

Money and Markets (www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit www.moneyandmarkets.com.





Potential oil Disasters




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