In a wide ranging interview in Barron's Larry Jeddeloh the Institutional Strategist makes a good case for higher oil prices. Common knowledge has long held oil to be a political commodity. Indeed the Saudis have used their spare production capacity and pricing power to pressure more vulnerable producing countires, mostly Iran. A new player has emerged and flexing his much photographed physique, Vladimir Putin.
Now that he sees an opening in the Middle East, Vlad is moving to join forces with the world's largest exporter to get what they both want and need, higher prices. Add to this mix, the Iranians threatening Saudi Arabia from Yemen to the south and a new potentially potent brew bubbles up. Iran is soon to be exporting more oil and would dearly love to get a higher price for it. Could a new alliance be in the making? Mr. Jeddeloh certainly thinks so, and he could be right.
The combined capacity of the three is over 25 MMBO/D. A little conflict here and there, a disruption of tanker traffic in the Straits (Hormuz and Malacca) and the stage could be set for supply shortages. The downing of a Russian fighter, the first combat loss of a Russian aircraft since their Afghanistan adventure seemed to go unnoticed in the oil market.
It would take a pretty stout and lasting disruption to take the 1 MMBO/D over-supply off the market for a price surge to occur. The question then arises as to how long that disruption would last and at what cost to the perpetrators.
One thing is certain, a price increase to $60 would activate a lot of rigs in the US and more supply would be on line. It is conceivable this would occur before the floating inventory is worked off. Are we going to see higher oil prices? Mr. Jeddeloh thinks the risk of a conflict in the region is building fast. He probably knows more than any of us and has thought through the motivations of the parties deeply.
Where we have a differing opinion is the supply response that would bring about. The consequence could well be a loss of market share for the Saudis and Russians. Not what they wanted to begin with. But it certainly points to the place we need to be watching.