Recently, I wrote on these pages that a remarkable turnaround was taking place in the President’s fortunes. It’s an impressive display of rising from the depths of falling popularity last fall, and it is starting to be felt in many areas, with major impacts on the future of energy.

At his lowest point, the U.S. President was widely regarded as a lame duck, shedding influence and power, and on a down-hill slide.

This was followed by a number of embarrassments, with one of the worst coming from Russia, when it chose to provide sanctuary to Edward Snowden who revealed that the U.S. was hacking the strategic communications of its closest allies.

More damaging, the revelation came at the worst possible time for the U.S., seriously discrediting its campaign to enlist allies against alleged Russian and Chinese hackers.

This was followed by another embarrassment where the U.S. utterly failed to prevent U.S. allies from joining the Chinese-sponsored Asian infrastructure bank. It seemed that the doomsayers were proving correct about America’s decline and fall.

Since then, Obama has been on a roll, with victories in Congressional trade agreements and at the Supreme Court with decisions that removed legal and constitutional challenges to the President’s health program, and gay marriage.

Following hot upon these achievements were the successful negotiations with Cuba and Iran, that went far beyond expectation, climaxing with the signing of the historic Iran nuclear agreement.

Even more surprising was the President’s ability to marginalize the powerful lobbies and opponents of these agreements, including hard-liners in the U.S., Iran, Israel, and the Gulf Kingdoms.

Not Your Father’s Sanctions

In the past, the effectiveness of sanctions was often questioned because of the difficulty of tracking compliance. The result was that targeted countries easily hid and continued banned activities. The sanctions golden rule: if you can’t track them, you can’t enforce them.

But current sanctions are nothing like they were in the past. The difference is that technology has lifted surveillance to unprecedented levels. What with spy satellites, drones, and sophisticated listening devices, the U.S. now has the capacity to pierce nearly every form of communication and transaction. That is the secret weapon which enables the west to impose iron bound constraints that can level just about any economy.

Whether the participants in the recent negotiations will comply with the terms of their agreements, only the future can tell. But there’s little question that none would have come to the table without the sanctions.

Recall also that only first stage sanctions had been imposed on Cuba, Iran, and Russia, with each nation clearly warned that far worse lay in store if targeted activities continued.

The message was hardly lost on the ever pragmatic President Putin, who despite brave words of resistance, suddenly saw that it was to his country’s benefit to cooperate with the U.S. and its allies, particularly in the Iranian nuclear negotiations, and the ongoing war in Syria and Iraq.

Nor was the message lost on China either, who also suddenly found it in their interest to stop island building in the South China Sea, and began negotiations with its neighbors over territorial claims, as urged by the U.S. and its allies in the region. China ‘acting poor’ when Russia recently came calling for financial help also smacked of western influence.

Contrary to their rhetoric, Iran and Russia were deeply chastened by sanctions, even more so by the oil price collapse, and have agreed to major concessions. It’s no accident that both countries are also becoming ever more important in the world’s anti-terrorism campaign, an effort clearly being coordinated with the U.S.

OPEC Support

Playing into Obama’s hand was a different sort of victory taking place during the same period. That was the Saudis leading OPEC to defend their traditional market share by flooding the oil markets.

The ensuing trade war against competitors has caused every other major oil producing country and oil companies to cut future development plans. Importantly, the oil glut reinforced the damaging effects of sanctions on targeted countries.

Some conspiracy theorists have claimed that the U.S. Administration conspired with the Saudi King to create an oil glut by over-producing, directly aimed at crashing the Russian economy, where energy accounts for nearly 50 percent of its budget.

U.S. Investment Bank, Morgan Stanley recently reported that the Saudi’s were over-producing by some 1.5 million barrels per day in a market with a surplus of around 800,000 barrels per day.

The Bank added that the oil markets’ fall could be worse and last longer than the one created 1986, in which Saudi Arabia grew tired of shouldering the burden of production cuts and decided to flood the market in an effort to pursue market share.

With Iran expected to return to markets, thereby adding to the glut, the bank also stated that these current moves made the risk in oil markets “historically unanalyzable,” a red alert to the investment community.

Oil Glut Ricochet

The Saudis enthusiastically took up the opportunity to lower global energy prices, ostensibly claiming they were not aiming to kill off rivals in Russia or the U.S., but merely that they were not the highest cost producer.

There were also other unexpected reversals. It has been widely reported that the Gulf Kingdoms are outraged over the U.S. drawing closer to Iran, as well as the U.S. distancing itself from the wars in the Middle East. Evidence for this view can be found in the Saudis’ multi-billion dollar deals with the Russia, which fly in the face of U.S./EU sanctions.

The clincher in the Russian-Saudi entente may just have occurred with the sudden ISIS terrorist attacks in Saudi Arabia.

The Saudis are all too aware of the threat that ISIS presents, the monster that some claim they created, and are now badly in need of military assistance, especially with the U.S. declining full scale military engagement in the region.

The Glut’s Toll

The result of the ensuing glut is a fast declining industry that is now willingly accepting new production cutbacks, while oil producing countries like Russia, Canada and Australia, are edging dangerously close to recession, with their currencies hitting six year lows.

As reported by CNBC, global job losses in the oil industry have reached over 141,200, with severe ripple effects across supporting industries. The U.S. is by no means immune to the downtrend, where current lay-offs in the energy field are approaching 71,000, and expected to climb.

U.S. Strategy for the Middle East

If, as it seems, Obama is back on top as a world leader, it’s important to understand his overall strategy and the likelihood of success.

The consensus amongst energy mavens is that if the Iran nuclear deal eventually leads to a withdrawal of sanctions, the results will be increased Iranian supplies, forcing prices lower by some $10 per barrel, according to World Bank estimates.

But Iran’s nuclear deal is about much more than the price per gallon. What the U.S. and its allies are trying to accomplish is no less than the reversal of political hostilities that have marginalized Iran for over thirty years and fueled hostility across the region.

As the President recently stated, the nuclear agreement is also meant to restore Iran as a regional leader in the Mid-East and turn a hostile relationship into at least a neutral one. That could go a long way in changing the political structure of the Middle East, while reducing the West’s dependency on its traditional allies in the region.

That’s not to say that the U.S. and Iran are destined to become close allies, but to recognize that they have important shared interests in combatting radical Islam that could lead to far greater cooperation.

There are some who claim that despite denials, the U.S. and Iran are already cooperating in the West’s battle against ISIS in Iraq and Syria. If so, that could go far in supporting Obama’s goal to pivot from the Middle East and towards Asia.

As stated here, another overriding U.S. goal is to prevent Iran’s drift eastward into a commercial and military alliance with Russia and China, as a partner in the recently formed Shanghai Cooperation Organization, the Eurasian Economic Union, and Silk Road project. Instead, the U.S. wants Iran positioned as a competitor to Russia for EU and Asian energy markets, and as a bulwark against Russian and Chinese expansion.

The problem for the administration is that hard-liners at home and abroad, having failed to kill the deal, are continuing their efforts to stop any broader entente emerging between the Iran, its neighbors, and the world.

Here, the road is likely to be far less smooth for Obama. Unlike the nuclear deal that was undertaken under the banner of a UN resolution, any further U.S. political deals with Iran would be subject to congressional approval, something few experts view as forthcoming.

What with these formidable barriers to entente, a continuing drift eastward by Iran towards a closer commercial and military relationship with Russia and China remains a strong possibility.

But I think that the nearly two years of nuclear negotiations with Iran, if it accomplished nothing else, restored Iran to the position of a recognized regional power.

Iran is also unlikely to forget that both China and Russia voted in the UN to support sanctions against Iran. Nor is the fact likely to be ignored that Russia also declined to breach sanctions to deliver a previously contracted system of advanced missile defense systems to its erstwhile ally. Russia’s sudden close relationship with the Saudis is also not likely to sit well in Tehran.

For Iran, an over-riding goal in the deal was the repeal of sanctions, enabling the country to regain its former status as OPEC’s third largest producer. With that goal more realistic in light of a successful conclusion of the recent negotiations, Iran is unlikely to adopt policies to antagonize its newfound partners.

Instead of becoming captive to either Russia or China, Iran is far more likely to promote itself as an anti-terror partner with both west and east, while building investment markets with both sides of the ‘great game’ for its own benefit.

At the same time, Iran is leading the movement to form a united front against terrorism, partnering with the U.S., the Gulf Kingdoms, Turkey, Russia, and Syria.

Conclusion

In a region often beset by conflicts, with hardliners at home and abroad working against it, the odds are high against the success of the American strategy and the Iran deal.

Israel’s Prime Minister Netanyahu has turned the deal into a partisan issue in the midst of a presidential election campaign, in which it will undoubtedly play a major part.

Leading U.S. Democrat Congressmen have gone rogue against their administration, voicing opposition to the deal. Advocates on both sides are now raising the specter of war as the sure results of their opponents’ plans. Can pictures of mushroom clouds be far behind?

Arrayed against the deal opponents are the powerful interests of the international business community, now impatiently chomping at the bit to get into Iran’s virtually untapped market.

Nearly every major western country has recently sent trade missions to Iran in anticipation of sanctions being lifted. Representatives included major international oil companies, banks, and manufacturers. Their enormous influence and immense wealth will weigh heavily in resolving the issue.

A surprising announcement came that may hint at trending opinions in Europe: Yesterday Switzerland became the first country in the world to lift sanctions on Iran, in support of the nuclear deal.

For the President’s supporters, the deal holds real promise for the creation of a partnership of former adversaries united against terror.

If it proves successful, the world may finally have cause to breathe a sigh of relief, but as nearly everyone involved agrees, the outcome is still far from certain.

Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.

Although crude oil climbed above $43.50 on Friday, the combination of a stronger greenback and the Baker Hughes report pushed the commodity lower. As a result, light crude gained 1.28%, but closed the day below important resistance zone. What’s next?

Friday’s data showed that U.S. producer prices were higher for a third straight month in July and factory output increased at the fastest rate in eight months, which supported the greenback and made crude oil less attractive to users of other currencies. Additionally, Baker Hughes reported that U.S. oil rigs increased by two to 672 last week for the week ending on August 7, marking the fourth straight week of weekly builds. In these circumstances, light crude gave up some gains, but closed the day above the March low, invalidating earlier breakdown. Will we see higher values of the commodity in the coming week? (charts courtesy of http://stockcharts.com).

Larger Image

Looking at the weekly chart we see that although crude oil slipped under the March low, the commodity rebounded and closed the week above this important support level.

What impact did this move have on the very short-term picture? Let’s examine the daily chart and find out.

Larger Image

From this perspective, we see that crude oil moved little higher on Friday and invalidated the breakdown under the March low. Although this is a positive signal, which suggests further improvement, light crude is still trading under the solid resistance zone created by the green and blue declining resistance lines and also the green horizontal line based on the Jan low. Additionally, Friday’s move is quite small (compared to previous upward moves marked with blue) and materialized on tiny volume, which means that oil bulls are not as strong as it seems at the first sight.

What does it mean for the commodity? In our opinion, all the above in combination with the current position of the indicators (there are no buy signals, which could encourage oil bulls to act) suggests that another test of the support area created by the March low and the red declining support line is very likely. Nevertheless, we believe that the risk of re-entering short positions is too high at the moment. The reason? We think that the best answer to this question will be the quote from our previous Oil Trading Alert:

(…) Please consider the way crude oil declined in January 2015. Black gold declined sharply at first, but the final days (and weeks) of the decline were not sharp – crude oil declined slowly and the thing that was indeed sharp, was the corrective upswing that we saw in the final part of the month. We wouldn’t want to be holding short positions should something like that happened once again and the risk of such action is not negligible.

Summing up, crude oil moved higher and invalidated earlier breakdown under the March low. Despite this (seemingly positive) development, light crude remains under the solid resistance zone, which increases the probability of another test of the red declining support line. Nevertheless, in our opinion, the outlook for crude oil is not bearish enough to justify opening another short positions – at least not yet. We’re happy with the profits that we took off the table recently and we don’t want to risk losing capital before a trade is really justified from the risk/reward point of view. We will continue to monitor the market, look for another profitable trading opportunity and report to you accordingly.

Very short-term outlook: mixed
Short-term outlook: mixed
MT outlook: mixed with bearish bias
LT outlook: mixed with bearish bias

Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.

Looking at the weekly chart we see that although crude oil slipped under the March low, the commodity rebounded and closed the week above this important support level.

What impact did this move have on the very short-term picture? Let’s examine the daily chart and find out.

Four weeks after gold tumbled to 5-year lows on revelation of far lower Chinese gold holdings than previously anticipated, gold bulls find out that one of the world’s greatest hedge fund managers made gold the biggest holding in his fund in Q2. He also loaded up on 2 large miners.

Stan Druckenmiller’s family office, Duquesne Capital Management, bought 2.9 mn shares of SPDR Gold Trust’s GLD ETF, worth $323.6 million at the end of June, according to the Securities and Exchange Commission’s quarterly filing. Duquesne’s gold ETF purchase bumped the fund’s Facebook holdings off the 2nd position to become the biggest holding in the $1.47 bn fund.

Druckenmiller acted as George Soros’ chief strategist when he helped execute the shorting of the British pound to the extent of forcing the UK out of the Exchange Rate Mechanism in September 1992. Since its inception in 1986, Duquesne has had an average return of 30% per year. In early May, Druckenmiller told Bloomberg in May that interest rates were likely to stay near 0% for 10 years, casting doubt over whether the Fed would ever move to liftoff.

Druckenmiller vs Paulson

Despite the scale and timing of Druckenmiller’s gold position, it remains unclear whether the trade is a long-term bet on the stabilisation of gold resulting from a possible peak in the USD and lack of Fed hikes, or is a short-term trade aimed at taking profit after a brief bounce. The fact that Druckenmiller has also purchased 1.28 mn shares of gold miner Newmont Mining and 3.6 mn shares of copper giant Freeport-McMorcan in the same quarter could indicate he’s in it for the long run.

In contrast to Druckenmiller, John Paulson, the biggest holder of the GLD ETF, sold 11% of his holdings in Q2 after initially slashing them by 50% in Q2 2013 during gold’s 25% collapse that quarter. While Paulson is the biggest owner of GLD, accounting 4% of the ETF, the fund makes up less than 5% of Paulson & Co’s holdings, ranking 7th out of 64 different securities.

As John Paulson is quietly planning an exit out of his gold holdings, Druckenmiller is prominently loading up on the yellow metal.

The uranium sector has been waiting a long time for this week. When one of the world’s most important markets for the metal has finally come back online. 

That’s Japan. Where the long-awaited restart of the country’s nuclear reactor fleet officially began yesterday. 

Major utility Kyushu Electric Power reported that it flipped the switch on the Sendai number one power plant in southern Japan on Tuesday. With the reactor now expected to reach full power generation capacity by Friday. 

The move is of course a small one in terms of Japan’s overall nuclear capability. With over 40 other reactors around the country still sitting idle, after having been shut down in the wake of the Fukushima incident in 2011.

But the restart shows that Japan is intent on returning to nuclear power. Which could pave the way for other plants to return to service soon — potentially beginning with the number two reactor at Sendai, which lies within the same complex as the plant that was rebooted this week. 

It will be interesting to see if this psychological boost for the nuclear market provides some support for uranium prices. Which have been languishing around $35 per pound since late April. 

Prior to that, announcements about potential nuclear restarts in Japan had prompted notable rallies in the uranium price.  Including a rapid jump to $44 in late 2014 — and a test of $40 this past April.

If we do see a similar rise in the price based on this week’s restart, it could create a firmer floor. Potentially leading to a more-sustained rally in the metal. 

That would be especially true if more Japanese reactors come online over the coming months. A scenario that is likely — with the restart of the Sendai number two plant currently scheduled for October. 

All of which would be welcome news for the commodities complex, given that uranium is one of the only metals holding steady in terms of price lately. 

Here’s to a bright spot,

Dave Forest

dforest@piercepoints.com / @piercepoints / Facebook