Oil markets consider Chavez peace plan
“All we are saying, is give Hugo a chance.” The market seemed a bit calmed on reports that the Chavez peace plan was being taken seriously. Seriously? Well perhaps by the Arab league and a few naïve folks that really believe that Gadhafi can be treated like a legitimate leader, which he is not if you listen to President Obama. The President said, "Colonel Gadhafi needs to step down from power and leave. That is good for his country. That is good for his people." The President also said, "Violence that they perpetrate against innocent civilians will be monitored, and they will be held accountable for," said Obama. "They should know history is moving against Colonel Gadhafi."
History is also moving against the oil bears. Not only is oil moving higher because of the significant risk to supply, but also because of solid evidence that the economy continues to improve. Jobless claims hit a 2-year low, manufacturing is humming, and things are looking up, if it weren’t for this darn oil market. Just as the economy is starting to show significant momentum, the oil price puts things on edge. Not only can the high price of oil zap confidence, the inflationary aspects of the rising price could deal a major blow to central banks trying to cajole the economy back into growth.
We already know that inflation is the fear of Jean Claude Trichet that moved markets with comments that the ECB's next move may indeed be a rate increase. The comment enhanced the dynamic that the ECB will raise rates before the Federal Reserve, sending the euro to a four-month high against the dollar. This seemed to bring down the Brent crude as the prospects of higher rates in Europe would reduce their oil demand. The WTI in turn gained as a more accommodative Fed would increase US demand in comparison.
The Trichet comments also led to profit taking on gold and silver as it took out some inflation premium of the threat that at least one central bank is taking the threat of inflation seriously.
Oil traders have to take the threat in the North Africa Seriously. To think that these problems are going to go away overnight is to be in denial. While I do not want to be an alarmist, there are years of frustration in the region that is starting to reveal itself. Every country in the region is at risk to one degree or the other. The market will be keenly watching developments in Saudi Arabia, the world's largest oil producer where dissidents are calling for days of rage.
Treasury secretary Tim Geithner says that the US can release oil reserves, yet Russia at this point is sending a different message. Dow Jones reports that, "Russia won't increase oil production to prevent further price increases due to the crisis in Libya, German magazine WirtschaftsWoche reports in a prerelease Friday, citing Russian Energy Minister Sergei Shmatko. ‘The fact that prices are rising is due to concerns over possible shortages but this is only a short-term impression.’”The report quotes Shmatko as saying that there is a need to “remain calm." Easy for him to say!