Oil hanging on Iran, inventories secondary

Quote of the Day

People may doubt what you say, but they will believe what you do.

Lewis Cass

2012 started with geopolitics taking center stage insofar as oil prices were concerned while decent manufacturing data out of China, Germany and the US (which expanded at the fastest pace in about six months) helped propel equity and other commodity prices. In addition with Europe not in the foreground yesterday was clearly a risk on trading session. Whether yesterday was mostly short covering or new longs coming into the markets is still not known. We will have to see if we get follow through in all of the main risk markets to start to view the start of 2012 as the beginning of a new uptrend pattern.

Oil prices surged first and foremost over the rhetoric that has been coming from Iran which started over the weekend during their military exercises in the Persian Gulf culminating with Iran warning the US to not bring its aircraft carrier back into the Gulf (which was moved to the Sea of Oman during the exercises). The US responded by simply saying they will continue to provide security in the region, or in my words they are definitely coming back into the Persian Gulf. There is certainly reason to be concerned over the growing tensions between Iran and the west and that is why we have seen the risk premium growing in the price of both WTI & Brent over the last few days.

However, I view the situation as Iran negotiating with bluster much like Saddam Hussein did prior to the final engagement in Iraq. Iran is starting to get more and more concerned over the sanctions that are being imposed with the latest coming from the US targeting the Iranian Central Bank. In addition I think they are sending a message to the Europeans to try to discourage them from embargoing purchases of Iranian crude oil when the EU meets on Jan 30th. I think the likelihood for an all-out military conflict at this stage of the game is very low. I do expect Iran to try to save face and restart the negotiations (which they called for over the weekend) to try to prolong the situation as they have done for the last four or five years. That all said we will now have a risk premium in the price of oil and all of the 30 second news snippets coming from the region will act as short term price drivers for at least the first quarter of this year.

On a more positive note the macroeconomic data to start 2012 has been better than expected (so far) and has resulted in a modest short covering/new risk on rally. A lot more important data will be emerging over the next several weeks to allow the market to evaluate whether the probability of Europe and US heading back into recession is increasing or decreasing and whether or not China is likely to start to expand once again. If the latter part of last year was a guide the macroeconomic data has been improving and mostly beating the expectations for the US and to a lesser extent for Europe. China has been showing signs that the government will be embarking on a more accommodative monetary policy to foster expansion in 2012 as they remain concerned over the falling level of exports to Europe and to a lesser extent the US...their two largest customers. The big data point this week will come on Friday when the widely watched US nonfarm payroll number and unemployment rate are released. The early consensus is calling for a net gain of about 150,000 new jobs and small bump to 8.7% in the headline unemployment rate. Finally, for what it is worth, Europe has not been a dominant negative so far this year...but it is still early in the year.

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