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This is a real-world story, showing how paranoid Wall Street has got about oil, and desperate for cheap oil. For obvious reasons, no names are mentioned. OIL PRICES - ARAB GULF STATES TO THE RESCUE ? Andrew McKillop Late November saw Wall Street shellshocked from stock indices that reeled with the US dollar, from serial bad news on the credit crunch, with home loan defaults shifting now to car loan defaults, and after that who knows ? Perhaps defaults on credit card loans for school books, clothes or parrot cages ? Behind or to the side of this as permanent bad news for seamless, Teflon growth of equity markets so recently at all-time highs, was or is the specter of ultra high oil prices near 100 US dollars a barrel. For starters oil isnt in the same league as improbable, but real paper losses from credit linked and derived financial instruments, swaps, bonds and suchlike, that suddenly lost their glamor and market appeal in summer 2007. In the flight to quality, to low-yielding but surer financial paper closely linked to governments, like US 10-year treasury bills, the Frankenstein creations of financial whizzkids or engineers have left vast stacks of paper to write down in value, often by 90% on face value, sometimes a simple and final 100%. In Europe for example, maybe 2000 billion USD, around 1400 billion Euro or 1000 billion GB pounds of face value paper could be at risk of massive write-downs. Basically, nobody will buy it. In the US, in the home loans sector, any guess will do for the size of junk-status mortgage and credit related paper swilling round the finance circuits, but it could be 3000 or 5000 billion USD in nominal or 'face value' terms. Compared to that, at present sky-high, dangerous and inflation-stoking oil price levels a guesstimate for OPEC's total revenues in the next 12 months might be 650 billion USD. Yet this gets written into the disaster scenario different ways and often. Mostly it hinges on the magic word 'confidence'. Teflon consumers can pull out of their swoon, start paying back their mortgages, buy new cars, take a flight to Honolulu or Hong Kong and joyfully buy a dozen new parrot cages if they get their gasoline, heating oil and plastics or pharmaceuticals just a bit cheaper - not a tiresome and constant bit more expensive. ARAB OIL TO THE RESCUE Over lunch in a chic New York sushi bar very late in November with a former chief oil strategist at a rather well-known investment bank we heard how critical and vital it is to act now and do something. His former employers had themselves been doing some bloodcurdling write-downs of junk paper, so he knew exactly what is needed. Stop the spiral sending oil prices to crazy heights, bring back confidence, save the US dollar and give some collateral life to those drooping stocks and equities indices. Of course our oil strategist doesnt believe in Peak Oil but along Wall Street, and in other places, that is understandable. In a secular age belief in something clear and easy to gurgle at the microphone is necessary. Unlimited oil reserves exist in the Arab lands. Everybody knows this ! Schoolbooks of the right vintage, and prime-time TV of the right and far-right editorial bent say that, so it must be true. We heard from the expert how one and all of his high level contacts inside OAPEC and the GCC-Gulf Cooperation Council were sweating bullets, even in late November around the propane-fired campfire outside Dubai city limits, with a tasty halal lamb chop on the skewer. They had already acted to save Citigroup with a generous injection of 7.5 billion USD in cash, although Citigroup might have another 25 or 30 billion in mortgage derivatives and other junk finance paper to write down and out, but they and the cream of Wall Street knew high priced oil was really to blame. It was now time to act, hike output, and send oil prices back to ground zero - say 55 or 60 dollars a barrel. The uncharitable might say that isnt really cheap, and the outright cruel might say its a campfire dream along the 12-lane desert highway. Cooked up in an alcohol-free bonhomie session with a gas powered Honda generator to run the laptops, lights and music this dream has one fatal flaw - its a dream. At dawn, everybody will be gone to take their next flight in a fuel efficient Airbus or low carbon Boeing, and can forget everything on arrival. Our expert told us to believe the anxiety of sunni sheikhs who own and operate OAPEC and the GCC. They had downloaded clever spreadsheets and amusing blogs convincing them extreme high oil prices will crater world oil demand after destroying US economic growth. After that, they learned, world oil would tilt back to permanent oversupply and permanent low prices, just like the grim days of 1986-1999 when nobody thought of, or could pay for 75-storey office blocks at the desert's edge. Asking the difficult question "Who is going to bail out Citigroup and its lookalikes with 7.5 Bn dollar cash injections, if oil prices slide to nothing ?" only got the reply that this is a structured and targeted confidence building operation, needing 55 or 60-dollar oil for success. After January it could go back to 65-dollars, perhaps; what is needed is instant confidence, right now. The sushi bar session was paid by an interested listener usually trading tech stocks, but as he said you never know where a good tip will come from. As our expert readies to leave us we learned he was flying that very night to a Gulf sheikhdom, and a predictable whirlwind series of inevitably hi-level strategy meetings. Enough new barrels of sheikhly oil would be rolled out to knock prices back to the magic comfort level, say $60-a-barrel, or even less than that, inch'allah. His Arab friends are sure and certain they can do it, they say so, but he told us they need him to mastermind the operation. Otherwise, he forecasts instant doom and his Arab pals agree: "the S&P 500 could slump to 1250 and the US dollar to 60 Euro cents". Gosh and golly. How did things get so terribly bad ? To be sure this will be relayed by the usual finance media culprits. Expect plenty of downside and bearish oil news being injected to Bloomberg TV, CNBC business news, Fox business news, Wall Street Journal, Economist and Financial Times. The newsy-viewsy easy reading, watching and listening will be great for all believers in a cheap oil future. Who cares about reality ? The interested listener footing the bill had the right to one last question, on how rational this strategy can be with world oil supplies so tight. So many things could thwart this noble project if the extra barrels are not physically rolled out. It could turn even colder and stay that way in the US northeast, thought to be the only place on the planet that uses heating oil. Another creaky, under-maintained pipeline or refinery could blow up. The US recession might not be quite as scary as imagined, the US Treasury will keep on printing money and Bernanke will likely go on cutting interest rates. Iran will go on being difficult, to say the least, about its nuclear plans, Iraq can go on being a mess, Pakistan can get to be a mess, with real live nuclear weapons, Chavez can be worse than ever. The litany of dangerous things for the strategy of cutting oil prices back to 60-dollars almost overnight might even include earthquakes. WTI oil at $95 a barrel could seem rather cheap in January 2008. Our well-traveled lad dismissed all that with a wave of the wrist. He was flying out of New York for nice meetings, floating on a raft of petrodollars. Those pastoral herder friends of his would try so hard to do their bit. The Kuwaitis have already, temporarily of course, reversed thrust and now claim their oil production isnt shrinking but increasing, with a production hike of "up to 0.25 Mbd" in the 3 months since August. When oil prices needed a boost they could tell us their reserves were shrinking. When its too high priced for Citigroup and the lookalike crowd of harassed investment banks, they say they are pumping more. Saudi grandeur should allow them to claim 0.75 Mbd more. They would lose face at anything less, but because times are tough they might limit their claims to a nice round 0.5 Mbd. The Emiratis and maybe Omanis will do their bit, also. Pretty soon we have a wall of new oil rolled out, and prices collapse. All this will be done "within days or weeks", he said with a flourish as he left. The oil strategist's colleague who sat and listened to all this with a wry smile later told us he trades a personal account. He has to face facts, not believe campfire stories. He tipped us with advice you can tell your grandmother to put her lifetime savings into, or at least the price of a few parrot cages. WTI nearby futures, or the next month's contract price, he thought could shrink to maybe $75/bbl on the downside, but then rebound well above $101.30/bbl in the next 60 days. Why he chose $101.30 was simple: this is what Wall Street Journal calculates as the ultimate oil price in 1980, in 2007 dollars. January or February calls at $101.30/bbl will be really cheap in the next 15 days, he said, but the 75 puts wont be cheap, so go sparingly on those. Set a 65% upside/35% downside straddle or butterfly spread using this advice. Bet both ways but mostly up. If you dont like that, he added with a wink, try sugar.