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0 Jan 19 2012 @ 10:58am by Matt Smith in Crude Oil, Global Energy, Risk Strategy

The Analogy Strikes Back

Given the popularity of last week’s post linking natural gas to Star Wars, I figured I would try to be a one-trick pony squeeze as much mileage out of this one as I could. Since some readers were flabbergasted at the omission of certain characters, here are some new analogies, with the emphasis on the crude complex.

Boba Fett = Somali pirates. The ultimate modern day comparison to the notorious bounty hunter Boba Fett has to be Somali pirates. As discussed previously on the burrito (while referencing another cult movie), the cold-blooded killers on the east coast of Africa have hijacked tankers carrying as much as 2 million barrels of oil, and cost the global shipping industry $9 billion a year. However, in signs that the dark side may be losing its luster, the number of successful attacks by the pirates have fallen substantially in the last year.

Han Solo and Chewbacca = WTI and Brent crude oil.  The theme of pirates continues as we turn to Han and Chewie, who for this purpose represent global crude benchmarks. Despite their very different backgrounds and characteristics, the two have been thrust together as partners. And due to their familiarity, they have become very close.

Although a fatal flaw in one of them (= Han = WTI crude) has led them to become separated (in a frozen-in-carbonite kind-of-way), just as in the Return of the Jedi they will ultimately be reunited (and thus should be the case for Brent and WTI once the conundrum facing the Keystone XL pipeline and Cushing supply glut is resolved).  This also makes the global crude market the Millennium Falcon, the vehicle by which our two scoundrels travel.

The Empire Strikes Back = CFTC. Otherwise known as the Commodities Futures Trading Commission, the regulatory board of futures and options – the CFTC – moved to strike back against speculation late last year, by voting through a proposal to limit the number of contracts a single firm can hold. The problem this poses is that it could lead to higher prices due to its limiting ability on traders to hedge positions. The new caps are set to take effect later this year, or possibly early next. 

The Phantom Menace = geopolitical tension. The invisible 800-pound gorilla in the crude complex is the threat of the phantom menace – that of geopolitical tension. This has been on the rise from various factions of late, from Iran due to their development of nuclear weapons (and subsequent threats to close the Strait of Hormuz), to uprisings in Nigeria in response to the end of fuel subsidies (resulting in the government backpedaling on this decision).

Add this to Syria uprising and sporadic bouts of tension in countries such as Iraq and Kazakhstan, and this leaves the phantom menace to keep crude prices elevated and on tenterhooks.    

Ewoks = Opec. A somewhat wild and unruly rabble, but one that is able to coordinate their efforts when needed, the Ewoks represent Opec. The most dominant character in the Ewoks – Wicket – represents the country in the cartel who wields the most power…Iran (tee hee) ……Saudi Arabia.

There you have it. I think I covered most of the main characters in these past two posts. Thanks for playing…and may the force be with you!

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