Iran Oil Embargo: Russia and The Baltic Dry Index Benefit

Albert's Animation



I really love macroeconomics, especially when it's about political themes. This Sunday 1 July 2012 Europe is starting a full oil embargo against Iran. It will not import oil from Iran.

Iran will lose 30% of its exports, while Europe loses 6% of its oil imports. This means tight supply of oil and a rising oil price (8%) as a consequence.

Chart 1: Crude Oil Price

Oil imports into Europe can be found here: http://ec.europa.eu/energy/observatory/oil/import_export_en.htm

Table1: Oil Imports to Europe

You can see that the biggest oil exporter to Europe, namely Russia (30%) will be the ultimate winner here.

Iran will definitely close the strait of Hormuz now. 20% of worldwide oil trade would be disrupted, the baltic dry index would spike and energy costs will rise.

Gazprom: Betting on Russian Natural Gas

Gazprom is the world’s largest gas business engaged in natural gas, gas condensate and oil prospecting, production, transmission, processing and marketing both inside and outside Russia. I have been very bullish on Gazprom (OGZPY.PK) in January 2012 because the fundamentals of this company were very positive. You can read my previous analysis here. I noted that Gazprom was severely undervalued and had a P/E of 3.5, handed out a dividend of 2% and had a price to book value of 0.6. Since that article, the stock price of Gazprom has gone down 15% (Chart 1). I recognize that was a bad call. The decline has much to do with the worsening conditions in the Eurozone.

So what has actually changed for Gazprom since January 2012?

Read the full analysis here.

Chart 1: Gazprom (Micex)

Euro Strength Finally Manifested

I have been monitoring the euro versus U.S. bonds versus S&P.

U.S. bonds have been very volatile, one day they go up and the other day they go down. There is no consistency whatsoever in U.S. bonds (green triangles). The euro has been relatively flat against the U.S. dollar, but it posted the biggest increase since I started monitoring it the previous month (blue dots). I hope this will be the first sign of euro strength, which means commodities could start rising. The S&P started to go down lately, but today it was pretty bullish.

There is no decoupling yet: when the U.S. dollar goes down, stocks go up.

Chart 1: Monitoring of EUR/USD VS. 10 Yr US Bonds VS. S&P

Silver Net Short Positions Lowest in a Decade

Today, as I navigated on GoldMoney's website, I learned a little bit about swaps and net short positions in silver. So I searched for keywords like swap and net short position and came to a very interesting website named Gotgoldreport.com. I wanted to summarize in short what I read there.

Apparently physical silver is headed higher and this can be deducted by the net long swaps, which are at their highest point from at least 2006 onwards. You can see that in September 2007, the silver price shot upwards from $US 13/ounce to $US 20/ounce when the swaps position declined. The same happened in 2009. Now the same will happen in 2012: when swaps (blue line) goes back down, you need to prepare yourself for a move upwards in the silver price.

Chart 1: Swap Dealer Net Position Silver

The second indicator is the net short position of the large commercials (LCNS) (Chart 2). Blue line is the LCNS, pink line is the silver price. There has never been so few net short positions in the commercial traders in a decade. And each time when there is a low in net short positions (September 2005, September 2007, October 2008 and now), the silver price would spike upwards with a delay of a few months. We haven't seen this spike upwards yet, because the net short positions are still declining, but once the blue chart reverses upwards, you can brace yourself for the biggest run upwards in silver ever.

Chart 2: Large Commercial Nets Short Position

Go to this site to get access to the long/short positions:

http://www.cftc.gov/OCE/WEB/data.htm

Here is the excel file: http://www.cftc.gov/OCE/WEB/Report%20Data/COT_Data.xls

I compiled the data myself by subtracting the long positions from the short positions and I came up with chart 3. This basically means that commercials were always net short silver throughout history. And this longer term Chart 3 also confirms that net short positions are the lowest in a decade.

Chart 3: Net Short Positions (LCNS)