Oil weighs impact of opposition promises

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We can't plan life. All we can do is be available for it.

Lauryn Hill

Some of yesterday's weak shorts quickly exited the market today (in a low trading volume level session) as uncertainty continued to cloud the evolving situation in Libya. Today the market was still digesting yesterday's statement by the opposition group indicating that some production could be resumed as soon as about a week or so. Today, many market participants were a bit less confident that supply will return that quickly and as such some of yesterday's losses were erased in a partial reinstatement of the fear on trade mentality. That all said, I do not think today's activity was significant or the beginning of a new major upward surge in prices in the very short-term (barring some unforeseen change of events in the Middle East). As I discussed in detail in yesterday's report, there is no shortage of oil anyplace in the world (see today's API crude oil stock build below as an example) and whether or not Libyan oil partially hits the market or not, it will not make a material difference to the overall supply & demand balances. The major impact the resumption of some Libyan oil will have is to narrow the sweet/sour crude oil differentials that have widened out strongly since the Libyan revolution.

On the financial side of the equation, the global equity markets have been mostly neutral for oil prices as well as the broader commodity complex so far this week as shown in the EMI Global Equity Index table below. On the week the Index is currently 0.3% lower widening the year to date loss for the Index to 0.6%. The US Dow has moved into the top spot of the winner's column for 2011 with China's Shanghai A bourse holding a close second place. Market participants are still very comfortable with the US Central Bank program of fueling asset values via a continuation of QE2 while China is looking more and more favorable as the Chinese Central Bank continues to battle back inflation risk. Two distinctly different monetary policies at the moment and both currently being somewhat embraced by the market!

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