At about $140,000 a week or so, that's expensive storage. At first, conspiracy theorists were wondering if they were preparing for some kind of war or attack. But more conventionally, it may be they're having problems selling the oil. Their oil is not very high-quality and there are only a few places they can take it and refine it. India, China, and the US are among the countries with refineries that can take Iranian oil. (And yes, George Friedman of Stratfor tells me some of it does end up in the US from time to time.)

India's refiners are telling Iran they no longer want their oil, preferring the higher-quality stuff that's readily available in the area. So Iran has to decide whether to send it to China or "repackage" it so that it can end up in the US, while they try to get refiners in India to change their minds. Thus, they're leasing tankers to store the oil they're pumping.

I called George at about six this evening and asked him about the Iranian situation, as that is a lot of oil that could come on the market at some point, as well as a possible reason that oil supplies are down. George has analysts on top of this situation.

He told me, "John, it's more interesting than that. It is not just Iran. Today we started checking on how many tankers Iran had, and soon discovered that there is a serious tanker shortage. Lease prices have soared in the past few weeks. It is clear there are a lot of speculators betting that oil is going to rise to $150 or so and are willing to pay very high prices for keeping the oil on the seas waiting for higher prices. It is a speculative boom."

He then told me about flying into New York in the early '80s. Outside the harbor were 30 or so tankers just sitting, waiting for prices to continue to increase as they had been doing for some time. When they did not, they all tried to get into the harbor at the same time, and of course they couldn't. It was the top of the market. Prices dropped, and the owners of the oil had to go to the futures market to hedge what they could. I had heard that story, but George saw it with his own eyes.

Almost everyone (except the stock market) is convinced oil is going higher in the near term. As I noted above, this week's rally was partially due to short covering by large institutions and companies which had sold production far into the future at much lower prices. They finally threw in the towel and took off their hedges.

Is it 1980 All Over Again?

We may be getting ready to stage a very interesting economic experiment. Is Masters right that prices are driven by speculation, or is it supply and demand? Follow me on this one. I'm not saying that this will happen, but it's an interesting scenario.

Many developing countries subsidize the price of oil to their citizens, so they don't feel the pain of higher oil prices. But a headline in last week's Financial Times is that Asia is finally getting ready to cut their subsidies as oil rises to $135. The awareness that they need to allow market conditions to prevail is finally being acknowledged, as they cannot afford the subsidies. This is going to help drive down demand for oil over time.

As demand starts to fall, let's remember that the storage facilities for oil waiting to be refined are a finite item. If all those tankers end up needing to find a home at the same time, even as demand for oil is going down, you could see the price of oil go down rather quickly in the short term.

If you're leasing tankers to deliver oil that is already hedged in price, you want to get it to port as soon as possible so that your lease payments stop as soon as possible. You only hold it on the high seas if you think the price is going up by more than your carrying costs (the cost of money and leasing the tanker). If you start to lose money, you sell your oil on the futures market and get it to port as fast as you can.

Now, here's where it could get interesting. Oil is the biggest component of the commodity index funds. If oil drops and looks likely to go lower, then the massive buying of these funds we have seen in the past few months could dry up. As Dennis Gartman says, it takes a lot of buying to make the price of something go up, but it only takes a lack of buying to make it go down. And if there's net selling?

If we see money start to flow out of the index funds (and ETFs) because of momentum selling, that means the funds are not only selling their oil components, but also the grain and metal and meat. If the index funds are the key component in the rise of prices, we should see the price of all commodities go down in tandem and in sympathy. If oil is the only thing going down as index funds go down, then it is a supply-related issue.

But what if index funds continue to grow? If there's an abundance of oil, it will eventually show up in the spot price, as storage will be lacking, no matter what the longer-term futures prices do. The market will soon tell us whether index funds are a major factor. I tend to think that even while index fund buying is bullish, it's not the major factor that is the driver of commodity prices. And even if it is significant in the short term, in the long term fundamentals will drive the true price.

If it's simply index speculation, it will end in tears when the fundamentals catch up.

Let me say that I believe the long-term price of oil is going much higher. I was writing about $100 oil two years ago. $150 and $200 oil is in the cards at some point in the future. If you have not read the Outside the Box from last Monday, you should. My friend David Galland points out that Mexico, which supplies 14% of US oil, is likely to be a net importer of oil by the middle of the next decade, as their internal demand increases and production decreases. Iran will be a net importer within six years for the same reasons. Russia's oil exports are down this year, as are Mexico's. Energy costs are going to rise in the next decade, and maybe much sooner.

You can click on the following link to read the Outside the Box on where oil exports are headed in our future. And Casey Research does some top-notch analysis of energy investments (not just oil) in a very reasonably priced letter, if you are inclined to invest in individual stocks.

As for today, if I was in a long-only commodity index fund, unless my time horizon was very long I would be watching it closely and have some close stops. And I might wait until I saw what the price of oil was going to do. If you have some profits, then you might want to think about taking some off the table. Just a thought.

The Middle East, California, and Help for Myanmar

Next weekend I will travel with Tiffani to Laguna Beach to be at good friend Rob Arnott's annual shindig for Research Affiliates. In addition to the high-powered brain trust he has speak (Peter Bernstein, Burton Malkiel, Harry Markowitz, Paul McCulley, Jack Traynor, etc. - now that is name dropping!), two of my good friends and science fiction hall of famers (as well as leading futurists) Vernor Vinge and David Brin are going to present an evening session on what they see in our future. I will be moderating and trying to keep David focused. It should be a fun evening.

My South African partner and fellow Minyanville Professor, Prieur du Plessis, is absolutely driven to get me to come with him to Dubai and Abu Dhabi this fall... and I'm going to go. I've never been to those cities, but have read and heard amazing things, and look forward to seeing with my own eyes.

Now, as to Myanmar. By now, you know of the tragedy that is unfolding there. My great friends at Knightsbridge (Ed Artis, Jim Laws, and the team) are arranging to be allowed to go in with official visas to provide aid. These Knightsbridge volunteers are the best of the best when it comes to disaster relief. They know how to get medicine, food, and supplies to where it is needed most, and they personally take it in. They are staging in Thailand. Not only will they take in needed supplies, but they will be able to help coordinate with other NGOs (non-governmental organizations) that don't have "boots on the ground" to get aid to where it is needed. (Note: no dollars will be spent in Myanmar in keeping with current US government regulations.)

There will be two four-man teams going in. These guys all pay their own way. But they need money for supplies, transportation, etc. We need $150,000 to make a dent. I am going to give you a web link below. You can donate by check or credit card. The address is: Knightsbridge International, Post Office Box 4394, West Hills, California 91308-4394. If you write a check, please note on the check that the money is for Myanmar relief.

The Knightsbridge website is www.kbi.org. It is being changed as I write to update some of the more recent missions, but the link to donate by credit cards works just fine.

I know these guys personally and have spent a great deal of time with them. They have my full 120% endorsement. I am told all the time that I should charge for this letter. So, instead of paying for the letter, why don't you make a donation? If 10,000 readers sent $100 or $1,000, it would make a huge difference in the lives of desperate men, women, and children. Please consider helping people who have so little. And for some of you more adventurous types, maybe even think about going. And thanks.

Your hoping we can help in Myanmar analyst,
John Mauldin