Oil regains upward trend as dollar plummets

In both Yemen and Syria, the protests have continued even as initiative are evolving to try to appease the protestors. Unfortunately in both countries the protests have been and continue to be bloody. In Yemen the diplomacy is directed at removing the current President and moving to free elections. In Syria the protests are calling for the removal of Assad but so far the movement in Syria is well behind that of Yemen. Although Mubarak is long gone from Egypt the situation in Egypt is far from stable and how it all turns out is still a big unknown. The Egyptian powers have now recognized Iran and announced that Iran is opening up an Embassy in Egypt for the first time in about 30 years suggesting that direction this country may be taking. Although none of these countries are oil producers, they do impact the overall price of oil or at least the fear premium as what is going on in all three of these countries continue to have broad implications for the region, in particular the Israeli/ Palestinian balance of power.

Finally the next hot spot to watch in the region is Algeria once again. Unlike Syria, Yemen and Egypt, Algeria is a major OPEC producer who exports high quality crude oil. Protests are once again emerging in Algeria after a quiet period for the last month or two. Algeria's largest minority group, the Kabyles who number up to 10 million, is demanding that their government hold a referendum on autonomy. This is also to be followed by planned demonstrations which some are concerned could spread and turn out to be something more widespread. We will have to watch what goes on in Algeria over the next few days.

Although there is nothing imminent that will result in a shut-in of oil supply in the very short-term, the geopolitics of the region continue to create an umbrella of uncertainty that is feeding and supporting the fear or risk premium in the price of oil. As I have said before, we may see a receding of the risk premium from time to time (as we saw earlier in the week), but by no means is it going to be eliminated anytime soon. Geopolitics will likely play a role in the price of oil for at least the rest of this year.

Late yesterday afternoon the API released their latest inventory assessment. The API report was mixed and modestly biased to the bullish side. The API reported a crude oil inventory build of about 0.7 million barrels as refinery utilization rates surged by 2.4% to 81.3% of capacity. The API reported a decrease in crude oil imports. PADD 2 stocks were marginally lower after holding steady in the previous API report. They showed large surprise declines in inventory for both gasoline and distillate fuel stocks. Gasoline stocks declined by about 1.8 million barrels, while distillate fuel stocks were lower by 3.4 million. The results of the API report are summarized in the following table. So far the reaction to the API report has been mildly bullish although prices are in the midst of adjusting after the slide over the last two sessions. If Wednesday’s EIA report is in sync with the API report I would view it as biased to the bullish side.

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