Three Major Oil Market Stories

What's Happening

The pre-market stock futures were flat to slightly higher. The U.S. Dollar was steady and rising. Asian markets were higher. European markets were flat. U.S. Treasury bond yields were steady. The U.S. Ten Year note was trading with a yield of 3.82% in electronic trading. Crude oil was trading near $37. Gold was trading below $400.

With crude steadily holding on the $35-37 range in the last few weeks, and gasoline prices steadily holding above $1.75 a gallon for premium, we expect the call from Congress for investigations of the oil companies.

This usually suggests that a top is near. And given that spring is in the air in some parts of the U.S., that would give us two reasons to turn bearish on oil.

But, this time may be a little different. OPEC, despite its talk of production cuts, has continued to pump all that it can, and still demand is on the rise.

With tight supplies, maxed out production capacity, and U.S. refinery capacity not likely to be increased in the near future, the situations in Venezuela and Russia become increasingly important.

While the latter is in no hurry to make big deals with the U.S. anymore, there is still the potential at some point in the future for some kind of arrangement to come to fruition. But in the case of the former, the politics in Caracas, may clearly be the straw that breaks the oil market's back in the next few months.

Venezuela At The Boiling Point

The situation in Venezuela is so bad that CNN finally decided to report on it, eschewing major fluff like the latest escapade in Michael Jackson's life.

According to An estimated 50,000 "Venezuelans took the streets Saturday to protest the denial of a presidential recall vote, a decision they say threatens to shatter trust in their country's election process."

But inside the increasingly boiling pot of the Chavez government, several major developments occurred over the weekend.

According to 1) "Some Venezuelan opposition leaders believe President Hugo Chavez and close associates, including Vice President Jose Vicente Rangel, are planning to stage a fictitious assassination attempt against Chavez, sources in Caracas told Stratfor on March 6. These allegations have not been confirmed.) 2) "Petroleos de Venezuela Vice President Aires Barreto resigned March 5 from the state-owned oil company for what he described as ["personal reasons,"] Caracas daily El Universal reports. Energy and Mines Minister Rafael Ramirez quickly issued a statement saying that Barreto had not resigned over political differences with the government of President Hugo Chavez. And 3) and perhaps one to make a mental note of: "Venezuelan Foreign Minister Jesus Perez on March 6 rejected as untrue statements by Gen. James Hill, the head of U.S. Southern Command, that Islamic militant groups are active in Venezuela, Caracas daily El UNiversal reports. Hill said in Miami on March 5 that he is ["convinced"] that Islamic militants are on the Venezuelan island of Margarita.

On that last point, we would not be surprised if it were true. It has been confirmed by the Venezuelan government in the past that there are thousands of Cuban "doctors," in Venezuela. Other sources have suggested that the so called "doctors," are Castro's army in waiting, in order to protect Chavez in case of a major attempt to remove him from power.

Castro and Saddam Hussein had some kind of covert relationship during the years, with Castro acknowledging that he had some conversations with Saddam just prior to the U.S. invasion of Iraq.

It is also known that there are Islamic militants operating smuggling operations in far South America, in the region of the Brazil-Argentinian border.

For many years, it has been alleged that Chavez has been a major supporter, financially and otherwise, of guerilla forces in Colombia.

With so many parallel leads, all leading to the same two men, Castro and Chavez, both confirmed haters of the United States, and Mr. Bush, the chances of an Islamic military presence in the area is not just plausible, it is quite probable.

Chavez And Castro Are Almost There

The current action suggests that the last two surviving open Marxists in the Western Hemisphere are about to attempt to consolidate their plan, the control of a major resource rich country with a strategic relationship to the United States, oil.

According to the Wall Street Journal: "Since winning a presidential election in 1998, Castro's Venezuelan protege, President Hugo Chavez, has pursued the methodical consolidation of absolute authority under the guise of ["democracy."] Along with paramilitaries and community snoopers, the Chavez power grab has entailed converting the congress into a unicameral body, rewriting the constitution to enhance his rule and purging potential opponents in the military. Having ["legally"] completed these initial steps to consolidate his power, Mr. Chavez then militarized the government, packed the Supreme Court, imported a large number of Cubans to indoctrinate the citizenry and began choking off the private sector with capital and price controls. The Catholic Church and the media remain largely outside his grasp but regularly are targets of state intimidation tactics. Virulent Chavez rhetoric polarizes society, inflames hatred and puts the safety of independent thinkers at risk."

Over the last few days, Chavez has systematically blamed the United States for his situation. He has referred to U.S. president Bush profanely, (and he's not even a Democrat.) And he has consistently accused the U.S. of plotting his overthrow.

The Journal article concluded, and we agree, that, the Chavez and Castro plan: "is now in the final phases of consolidation. The noose is already so tight around the neck of what is left of the democracy that it may not be able to escape. Short of some improbable rebellion by the largely unarmed opposition, Venezuelan free society will be swinging from the gallows by the time Mr. Chavez's useful idiots in the U.S. Congress and the Organization of American States figure out that he is no democrat."

And while CNN is marveling at the fact that the people are demonstrating, what is really going on is the prelude to what is likely to be the imposing of dictatorial rule by force in Venezuela. According to " Over the past week, several U.S. government officials -- including officers with U.S. Southern Command (SOUTHCOM) in Miami -- have warned that Chavez is responsible for the growing political tensions and violence. For the first time, some U.S. officials also are saying that Cuban nationals disguised as Venezuelans have infiltrated all units of the Venezuelan National Guard (GN) and National Armed Forces (FAN)."

The situation is nowhere near calm, as some sources portray. also noted that: "Throughout Venezuela, opposition figures and people in neighborhoods where anti-Chavez sentiment is widespread have reported numerous cases of drive-bys, in which individuals on motorcycles have shot randomly into buildings and residences. In some parts of Caracas, such as Plaza Altamira, witnesses have reported sporadic sniper fire from rooftops during clashes between demonstrators and National Guard troops. Chavez and his senior officials have blamed the violence on the opposition, but European diplomatic sources tell Stratfor much of it was instigated by government forces and armed pro-Chavez civilian groups."

Classic signs of dissention are few but still present in the Chavez government, as "Venezuela's ambassador to the United Nations, Milos Alcalay, announced Thursday that he was resigning because he could no longer represent a government that abuses human rights."

Bottom line? By the end of 2004 or soon thereafter, we will see a newly crowned, by force, Marxist country in South America. That country is now known as Venezuela. After the Castro Chavez takeover, who knows what its name will be.

The Bush administration better hope that the oil from Libya to the U.S. starts flowing soon.

More Kremlin Hard Ball

A key player in the Yukos-Sibneft, Mikhail Khodorkovsky saga died in a helicopter crash, while the Swiss police ran a series of raids at the request of the Russian government at locations of companies in Switzerland that had connections with the Russian companies being investigated.

According to reports in the Wall Street Journal and the Moscow Times, quoting several sources, British lawyer Stephen Curtis managing director of Group Menatep, the majority shareholder in Russian oil giant OAO Yukos, has been killed in a helicopter crash in Britain.

The Moscow Times added that: "Police and civil aviation authorities in Dorset (U.K.) said that two men had died in a helicopter crash in a field near Bournemouth airport at around 7:40 p.m., (3-4) but declined to identify the men or speculate on the cause of the crash. A lawyer by training who was instrumental in creating Menatep's vast network of offshore structures in the 1990s, Curtis, a British citizen, was appointed to direct the embattled group in November after its principal shareholder, billionaire Mikhail Khodorkovsky, was arrested at gunpoint and jailed on charges of fraud and tax evasion. Curtis replaced Khodorkovsky's partner, Platon Lebedev, who was jailed on similar charges in July."

Both sources reported that raids took place in Switzerland in connection to Yukos-Sibneft. The Wall Street Journal wrote: "The raids came as Russia's Tax Ministry sent OAO Sibneft a claim stating that a unit of the crude-oil producer has failed to pay $420 million in taxes. The tax claim against Sibneft is separate from another appraisal, in which the ministry said Sibneft owes $1 billion in back taxes for 2000 and 2001."

The Moscow Times added: "Swiss prosecutors said in a statement that police raided offices and homes of people connected to the company in Zurich, Geneva, Schwyz and Freiburg. Officials in Bern could not be reached for comment late Thursday, and the statement did not disclose the names of the companies or people involved. The statement, however, did say prosecutors would hand over documents seized during the raids to Russian authorities and that they were acting in response to an official request on a case involving membership in a criminal organization, embezzlement and fraud."

Furthermore, according to the Moscow Times: "Prosecutors also said the individuals targeted in Thursday's raid participated in fraudulent trading deals involving fertilizer, oil and oil products. The revenues from these deals were allegedly laundered through Swiss companies and bank accounts, the statement said. According to documents obtained by The Moscow Times, Curtis played a central role in building Menatep's vast offshore empire, which is now worth dozens of billions of dollars. He was a key lawyer for Menatep since at least 1997, when Yukos was under fire from minority shareholders who accused it of redirecting corporate profits into offshore accounts linked to Khodorkovsky and his partners. Working out of his law firm's plush Park Lane office, which shared an address with a Yukos subsidiary, Curtis later oversaw efforts to consolidate some of those profits back onto the company's balance sheet."

The "documents" obtained by the Moscow Times, are likely to have been leaked by the Kremlin, as once again this article was written by Catherine Belton, the reporter who wrote a lengthy piece on 12-30-03, in which it was clear that Putin was setting the story straight for the U.S. as to why he was doing what he was doing and what was likely to be next. The article was part of a lengthy analysis we provided, titled: "Russia's Complex Situation And Putin's Leak To The West," and is available for review by clicking on the Special Report 1/13/04 link on the left margin.

What makes this report important is that for the first time, as far as we can tell, there is now a clear attempt, most likely by the Kremlin, to provide its major reason for the arrest of Khodorkovsky and its increasingly hot pursuit of oligarchs, money laundering. In the past, there have been other allusions to criminal behavior, such as the fact that the oligarchs bought state run companies for pennies on the dollar and became instant billionaires by marking the asset prices up to a more fair market value after the purchase. But that doesn't really wash on international circles, and only makes the Russian government look stupid.

The use of the term money laundering uses language that is clearly understood by the international community, and also shows that the Russian government is starting to learn how to spin their stories in a less "Russian" format.

In our report, 12-30 report, referenced above, we quoted the following line from The Moscow Times: "["Putin's aim is to restore the state,"] said Dmitry Rogozin, a Putin envoy and co-leader of the populist-nationalist Rodina bloc, which rode an anti-oligarch platform into the State Duma earlier this month. ["The state was very weak under (former President Boris) Yeltsin. It was filled with oligarchs that dictated their will to a puppet leader, which also left Russia weak in the global arena. Now a trend has been set in motion that is making Russia more of an equal player."]

The Moscow Times reporter Catherine Belton, an increasingly Woodwardesque figure in this rather complicated story of Putin's house cleaning, on 3-5 noted that "an aide to core Yukos shareholder Leonid Nevzlin said Thursday he didn't rule out foul play. ["The only thing we can say is that this is a great loss. He was a personal friend as well as a colleague,"] the aide, Eric Wolf, said by telephone in Israel, where Nevzlin lives in exile. Nevzlin said recently that he had received ["threats of a personal nature"] almost daily from people claiming to be Kremlin intermediaries. Curtis' personal assistant, who spoke on condition of anonymity, said he did not know whether Curtis had been threatened recently."

To be sure, "accidents" are still, and have for centuries, been a daily part of Russia's big time politics, and given the fact that there are billions of dollars at stake, and that Putin and Company declared war on the oligarchs, beginning with Khodorkovsky's arrest, engineered by armed special forces, nothing here would be a surprise.

The timing of the raids and the "accident" may be purely coincidental. But it is interesting that they occurred within days of Putin's governmental shakeup in which a new Prime Minister was installed. According to the Financial Times, the newly installed PM Mikhail Fradkov, was pulled by Putin from political obscurity, and has no political base to answer to. In essence, the new man owes his rise to stardom to Mr. Putin, creating a presumably loyal servant, in contrast to his predecessor who was a remnant from the Boris Yeltzen days.

Fradkov, "who has most recently headed Russia's mission to the EU, is an experienced trade diplomat with important foreign postings under his belt," would seem innocuous at first glance, given his obscurity. But as usual, there is more to this than meets the eye. The Financial Times reported that "his career began in the 1970s, when it was difficult for young officials to work abroad without cooperating with the KGB. Also, in his last two posts in Moscow he served as deputy secretary of the Security Council and head of the (uniformed) Tax Police, both organizations with ties to the security services. Fradkov represents a generation of former Soviet officials who saw the Soviet Union collapse just before they reached the top of the bureaucracy. They sat through the chaos of the 1990s watching younger men gain great wealth. They are among the strongest supporters of Putin's recreation of centralized power." summarizes the situation as one in which Putin has brought a tenuous balance to the Russian power structure. "Putin wants the prime minister to be a loyal technocrat he can trust to push Russia to become a technologically advanced state. Fradkov is qualified to lead the government to a high-tech breakthrough and boost Russian high-tech exports, especially in the military-defense sector. He also fits in with Putin's plan to reform state bureaucracy and fight corruption." More important, "Stratfor's sources in the Russian Security Council say that during his tenure at the Federal Tax Police Service, Fradkov presented Putin with well-founded materials to attack Mikhail Khodorkovsky, the richest Russian oligarch and former CEO of Yukos. By appointing Fradkov, Putin is introducing a new power center -- in addition to the St. Petersburg security officials and liberals -- into the game playing itself out atop Moscow's political Mount Olympus. Participants include an oligarchic clan led by Mikhail Fridman and Pyotr Aven, the bosses of Alfa Group."

This analysis jibes with our own, initially presented on 12-30, and reprised in our Predictions for 2004, in which we expected Putin to make moves toward some kind of conciliation with the White House, and to move closer toward the Bush team as the Russian election neared.


Putin is playing a dangerous game and is pulling out all the stops. By bringing in three sides to the Kremlin, he not only gets the best ideas from the brightest people, he can also keep them under his own personal watch, diminishing their ability to go about the country free to cause problems like Khodorkovsky did in his heyday.

For the U.S., and its oil industry, it may mean that there is still hope of some kind of melding with the Russian oil sector, although, the terms will not be as favorable as they would have been a few months ago.

The silence from the White House on these issues is deafening, suggesting that our analysis is right on the money.

Chinese in Sudan

Finally, an interesting and related sidebar came up, also over the weekend.

In "Successful Energy Sector Investing," we noted that the Chinese were the wild card in the oil markets, as their continuously rising demand, and dwindling domestic resources would force them into international situations and increase competition with the industrialized world for increasingly difficult to find and manage oil resources.

According to the Washington Times' Bill Gertz, we are now seeing that prediction beginning to play out. "David Hale, an economist who specializes in Chinese affairs, said in a recent speech that China has deployed about 4,000 troops to southern Sudan. The troops are there to protect an oil pipeline, Mr. Hale said. The Chinese presence was first disclosed by South African government officials who told Mr. Hale about the troops during a recent visit to South Africa. Mr. Hale said the Chinese troops represent a new concern about China. Beijing, starved for energy resources, is likely to become an expansionist power in the coming years as a way to gain access to oil and gas reserves. In addition to Africa, future energy-related targets for Beijing could include the Russian Far East, which is growing increasingly isolated from central Russia and Southeast Asia, where China, in the past, has made military moves in the South China Sea, where oil and gas deposits are believed to be held. A U.S. government official familiar with intelligence reports confirmed that there are Chinese in Sudan. However, the official could not confirm that 4,000 Chinese troops are there."

The Philadelphia Oil Service Index (OSX) held near 110 on 3-5. A long term move, if this move gains momentum could take the OSX to 140. The index rallied smartly on 1-20, and has reached an important resistance level, but had remained flat. For more details on trading the energy sector visit our energy timing page, featuring our highly effective OIH timing model and our Top Ten Energy Stock List.

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