Oil focus turns from Japan back to Libya

In addition to Libya, Saudi Arabia sent troops into Bahrain to try to stabilize the evolving situation in that country. Yesterday the Bahraini government imposed a state of emergency for three months which seems to set the stage for more aggressive action by the government and the Saudi troops against the protestors. Not that Bahrain is a large exporter of oil... it just happens to be in a strategic location in relationship to Saudi Arabia. If the Bahrain protests grow into an overthrow of the existing monarchy in Bahrain it could then spread to Saudi Arabia. It is that fear of losing supply from the largest supplier of oil in the world as well as the main source of surplus crude oil capacity that is starting to get the market back into worry mode once again.

A portion of the oil risk premium has been removed from the market as the world is not experiencing a shortage of oil anyplace in the world. In addition the Japanese disaster has resulted in Japan reducing their oil consumption for the foreseeable future and more than offsetting the loss of oil from Libya. So in the short-term, I do not expect the risk premium to surge, but I also do not expect it to be completely removed from the price of oil anytime soon. The risk in North Africa and the Middle East is far from over and as such oil prices will not only remain volatile but prices are likely to remain at elevated levels for the short- to medium-term. Recall before the Tunisian and Egyptian crisis the price of WTI was hovering around $85/bbl and on the verge of declining even further. Prices are now still hovering near the $100/bbl mark with Brent still trading well above the $100/bbl mark and that is after a portion of the risk premium has come out of the market over the last few days.

Global equities rebounded in Asia overnight led by about a 5% gain in Japan as shown in the EMI Global Equity Index table below. The Index has narrowed its weekly loss to 1.7% as well as its year to date loss to 2.6%. Seven of the ten bourses still remain in negative territory for the year to date with only the US, Canada and China still holding onto year-to-date gains. With the nuclear situation a bit more defined over the last 24 hours, investor/traders are now trying to analyze the impact of Japan on regional markets around the world.

Some of the questions yet to be answered is how much of an impact will the downturn in the Japanese economy have on the rest of the global economic recovery? How will the rebuilding and reconstruction of Japan help to stimulate the global economy in the medium-term? What will be the impact of repatriation of Yen by the Japanese government and individual companies (especially insurance companies) to pay for the rebuilding and reconstruction? Will Japan sell US Treasury bonds as well as hard assets around the world as part of the repatriation process and what will be the impact of such a strategy? What will Japan's requirements be for oil and all commodities for that matter in the short- and medium-term? These are just some of the questions front and center in investor and trader’s minds around the world and as one can imagine there are many differences of opinion as to the answer to these questions.

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