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Iran War Ships: Taking the Fun Out of Fungible

Written By Christian DeHaemer

Posted February 18, 2011

Yesterday, oil spiked after Israel warned that two Iranian war ships were going through the Suez Canal.

According to the Wall Street Journal: “Light, sweet crude for March delivery recently traded 2 cents lower at $84.97 a barrel on the New York Mercantile Exchange. Brent crude on the ICE futures exchange traded 17 cents higher at $103.95 a barrel.”

There are multiple things wrong with this picture.

First off is the idea that Iran’s navy is a threat to anyone. It turns out the “warships” where a frigate and a supply ship.

The last time Iran went hostile, the frigate IS Sahand took a couple of Harpoon missiles and four Skipper bombs from a flight of U.S. Navy A-6s.

Iran ShipIS Sahand 

That will learn you to drop mines in open sea lanes.

Besides, in the words of Crocodile Dundee, “That’s not a frigate, this is a frigate…”

independenceUSS Independence


All sizzle and no hat

Second, oil is a fungible commodity. The same grade of oil costs the same all over the globe…

But right now, Sweet Texas Intermediate is down to $84.99, but the Brent Sea Crude is running at $104 a barrel. Yesterday, the spread was at $19.48 — the highest on record!

The price of oil in Europe is going up due to tensions in the Middle East. But here in the United States, the EIA reported yesterday a 900,000 barrel increase in oil inventories.

The thing is that 300,000 barrels of that new oil is stuck in Cushing, Oklahoma — which only has pipelines in and no pipelines out, and just a limited number of refineries.

The new oil is coming from Canada and North Dakota.

Some trains are already bypassing Cushing and shipping to refineries in Louisiana. But it’s a bottleneck that won’t be fixed for months… maybe even years.

Furthermore, Cushing is running out of places to put the new oil. They are holding 38 million barrels and only have storage for 45 million.

The Saudis run along…

Another long-term reason for the large price spread is that two years ago, Saudi Arabia stopped using WTI as its benchmark for pricing. It claimed Wall Street had too much power to set the price, and that it “was too much like gambling.”

Valero Energy (NYSE: VLO), the big U.S. oil refiner, also stated WTI has “almost become irrelevant as an oil benchmark.”

If you want to trade oil, forget about the Goldman Sachs Oil ETF (NYSE: OIL) based on WTI. Buy the United States Brent Oil Fund (NYSE: BNO).

Third, Egypt (which controls the Suez), is not too kindly to the Iranians. This has something to do with the heirs of the fourth caliph and the Twelfth Imam disappearing in 931 AD.

The Shiite Muslim, who are concentrated in Iran, Iraq, and Lebanon, believe they didn’t have a legitimate, divinely-guided political leader until Ayatollah Khomeini showed up in 1978.

In the end, it doesn’t matter…

As we go to print, the Suez Canal Authority is reporting to Reuters that it hasn’t received any notification of Iranian warships. They further added that they needed advance notice of 48 hours. Other reports say the transit was canceled.

Israel was monitoring the vessels’ movements on Wednesday.

According to Reuters: “Israeli defense officials said that the country’s Navy planned to track the two warships as they crossed the canal… Israel’s Foreign Minister Avigdor Lieberman said that ‘Israel cannot ignore these provocations.'”

If Egypt allows Iranian ships to sail near the Israeli western shore, things could get nasty — and fast.

But it seems that this is Ahmadinejad just stirring the pot again.

Shares of the Israel Market Index ETF (NYSE: EIS) were up 0.2% yesterday, and are just about to break out to new all-time highs.


chris sig

Christian DeHaemer
Editor, Energy and Capital

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