Oil Prices & A Crafty Madam

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By Barbara Cohen
Chief Information Officer, ShadowTraders

Remember the movie, "The Mouse That Roared," staring Peter Sellers?

In this film, the European Duchy of Grand Fenwick declares war on the United States. While fully expecting to lose, Grand Fenwick plans to rebuild itself from the money it knows the United States gives to defeated nations, such as what the U.S. did with Germany at the end of WWII through the Marshall Plan. Enter 2012. Today we have a new take on the same theme, "The Mouse that Roared -- The Sequel": Iran and the price of crude oil.

On February 2nd, 2012, the price of light sweet crude oil was $95.80/barrel. At the close of business on February 24th, 2012, just 16 days later, light sweet crude closed at $109.77. In little more than 2 weeks, crude oil spiked over 14%. Was there no crude oil available? Was there a hurricane that closed refineries? Was there a pipeline that burst? No. It was a little country called Iran that basically declared war -- on the entire world. Iran put even more economic hardship on already financially challenged countries throughout Europe and the United States.

How can one small nation impact an entire world? Simple...by threatening to build a nuclear bomb and blow up Israel. At this point, the world is in such fear that Iran doesn't even have to carry out its threats, it just has to announce them...every few months.

Want to control an entire Futures Market? Lie low for a few months. Then quietly, start buying crude oil futures contracts at the New York Mercantile Exchange (NYMEX). Once you have acquired a huge number of contracts, announce that you are going to build a nuclear bomb and blow up Israel. And when overnight, your crude oil futures contracts skyrocket, up 14% you sell the contracts, pocket the cash, and do it all over again a few months later.

During December, 2011, the volume of contracts traded on light sweet crude oil was, comparatively speaking, low. In fact it had dropped to as little as 42,000 contracts traded in one day. And for the entire month, the average daily volume traded was well below 100,000. Move forward to January, 2012. An entirely new picture emerges. Suddenly the volume picks up, with the daily average being closer to 150.000, even spiking on occasion to over 200,000 contracts.

On January 25th, Iran announces that it is going to destroy Israel within a week; crude oil begins to spike in price.

Is this the first time that Iran has threatened to destroy Israel? On the contrary, every so often the same story emerges. April 15th, 2006, April 29, 2007, July 12, 2008, May 5th, 2009, August 17th, 2010, November 8, 2011, and now January 25, 2012.

Let's take a look at crude oil prices and compare to Iranian announcements:

In March, 2006, the price is $63.67. By April 15th 2006, the price is $72.00, just over 13% in 1 month.
In March, 2007, the price is $58. By April 29th 2007, the price is $66.46, just over 14% in 1 month.
In June, 2008, the price is $128. By July 12th, 2008, the price is $145.00,just over 13% in 1 month.
In April, 2009, the price is $52.51. By May 5th, 2009, the price is $58.63, just over 12% in 1 month.
In July, 2010, the price is $72, By August 17th, 2010, the price is $80,70, just over 10% in 1 month.
In September 2011, the price is $86.45. By November 8th, the price is $98, just over 13% in 1 month.

Do you see a theme developing?

Unlike before, however, when the price retreated as Iran backed off its threat to destroy Israel, this time Iran has not quieted down. Learning from previous lessons, they have continued to push the price higher and higher. In December, crude oil was trading as low as $93.53. Now it is trading at $109.77. In two months, the price has spiked 17%...with no end in sight.

The Iranian government must know that these prices directly deliver a major blow to world economies. This past two weeks, European countries released their GDP numbers: Germany at -0.2%, Italy at -0.7% and Great Britain, -0.2%. Japan's GDP was -0.6%. What is the price of gasoline today in Europe? In 2005, Europe was paying $5.50/gallon (converted from liters/Euros)...today over $8.00.

Iran is no longer the mouse that roars...it is now the lion that devours. And he is laughing all the way to the bank.


Barbara Cohen offers a weekly FREE Live Trading Webinar for anyone interested in learning about trading futures and stocks. Register to attend here.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Futures , Investing Ideas

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