Oil weighs risk premium for Japan and Middle East

Pray for Some Luck

Japan is going to need the luck of the Irish if they are going to get their nuclear situation under control. The suffering and pain in Japan is immense and to add to that, the threat of nuclear catastrophe is a trial that no human should have to endure. Overnight, in a desperate attempt to cool nuclear reactors, Japanese military helicopters dumped water on top of the Fukushima Daiichi nuclear plant. The other plan was to bring in a power line that could restore power to the area so they would have that ability to pump in water and avoid a further catastrophic event. An event that would raise the fear of oil demand destruction and take a bite out of global economic growth.

At the same time, in the Middle East the growing threat to peace and stability is a growing one as violence in Bahrain and the presence of Saudi Arabian security forces are raising tensions with their old advisory Iran. Iran is a backer of the Shia and has recalled its ambassador to Bahrain in protests for the killing of some Shia citizens. Iranian President Ahmadinejad threatened Saudi Arabia and the US directly by saying we have friends and those regional rulers need to find a "fair and Islamic" solution, or if not face the same fate as Saddam Hussein when he invaded Kuwait.

The raising of the stakes with tension rising between Iran and Saudi Arabia cannot be lost on the global oil market as those two county's oil production accounts currently for over 12 million barrels a day. Add to that instability, Libya. According to Reuters OPEC member Libya is the world's 17th-largest oil producer, third-largest producer in Africa and holds the continent's largest crude oil reserves. It normally pumps around 1.6 million bpd, 85 percent of which is exported to Europe. Output is normally equivalent to about 2 percent of global consumption, and unrest has cut it to about 500,000 bpd as many foreign and local workers have left the fields.

Reuters reports that, "Gaddafi's forces recaptured the eastern town of Ajdabiyah, which commands roads to Tobruk and Benghazi, the rebels' stronghold. All Libya's oil export terminals except Tobruk in the east are back under central control, the head of the Libyan oil workers' union told Reuters on Tuesday. Agoco, an oil firm based in rebel areas, said it was now only pumping oil to Tobruk in the far east of Libya after Gaddafi's forces retook Ras Lanuf."

Now Dow Jones says Gadhafi forces have taken control of Misrata. Libya's oil is going to be tainted and even if Gaddafi maintains power, they will face global economic sanctions.

The dual threat to both the supply side and the demand side played out across the all of the global financial markets yesterday in an epic struggle to try to remain calm and access the plethora of risks. Risks of possible historic proportions unlike any that we have ever seen before. Still the big question is whether the market is overreacting to these risks or whether the level of fear is justified.

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