Oil sheds 2.6% of fear premium

Quote of the Day

A man, who has committed a mistake and doesn't correct it, is committing another mistake.


Yesterday was certainly a risk off day in the oil complex as profit taking selling dominated Tuesday's trading session. The oil complex has been under pressure for the majority of the week so far with selling starting right from the opening on Sunday night after China's lower than expected manufacturing index number was released earlier in the day. The selling accelerated on the Bin Laden news and has returned yesterday after modest gains the day before. So far on the week the spot WTI contract has shed about 2.6% of its risk or fear premium or almost $3/bbl while the spot Brent contract declined by 1.9% or $2.43/bbl. Not a very deep downside correction considering the price of WTI was trading below the $100/bbl just five weeks ago.

The sell-off on Tuesday was a result of a bit of US dollar strengthening as well as a growing concern that higher oil prices are starting to impact demand (as discussed in detail in yesterday's newsletter). Overall not much has changed this week vs. last week. The geopolitics are mostly the same as fighting continues in Libya and oil remains shut-in while the market continues to price in a potential supply disruption from other areas of the Middle East as contagion has spread to several countries already. The democracy revolution continues.

On the economic front we have seen manufacturing numbers from around the world over the last few days all of which were a tad lower than the previous month but all (including China) were still above what is considered the threshold level indicating growth in manufacturing and thus mildly positive for oil and commodities. Higher oil and commodity prices are still fueling the inflation pipeline and as discussed many times in this newsletter many countries have already switched monetary policy to mitigate the impact of inflation…most noteworthy has been China which is also the main growth engine of the commodity consuming world. Even the EU Central Bank has already increased short-term interest rates last month and is meeting today and tomorrow to determine their next move. Many are expecting them to sit tight this month with another rate increase in Europe not expected until about July. Their decision could be a market mover tomorrow.

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