Oil torn between slowing economies and supply interruptions

Quote of the Day

A handful of patience is worth more than a bushel of brains.

Dutch Proverb

The battle between those concerned about a slowing of the US/EU/China economies and thus a negative for oil consumption versus those fearful of a supply interruption over the evolving Iranian nuclear situation continued to rage yesterday and into this morning. Yesterday those biased to the supply interruption won the daily battle as oil traded near a one week high. On the other hand concerns over the faltering European economy have the edge so far this morning as oil is now trading in negative territory for the session. Sounds crazy but the markets are still trading from a very short term perspective with the so called risk-on/risk-off mentality prevailing for all risk asset classes including oil.

You know my view on the Iranian situation...I do not think it will wind up with a military conflict nor will oil supply be interrupted by an embargo of Iranian oil purchases from the EU. It will result in a logistics exercise as the global oil supply system gets rebalanced. However, today an Iranian nuclear scientist was killed by a bomb placed on his car in an attack Iran has already blamed on Israel. So the tensions are increasing but so far it has not resulted in any surge in oil prices. China so far seems to be against the US & EU's strategy of curbing oil sales from Iran as they oppose unilateral sanction. It sounds like the meeting between Geithner and China's leader did not sway China and it also sounds to me that China is likely to be the main recipient of any diverted Iranian oil from Europe. Although the Iranian debacle is not impacting oil prices at the moment this issue will be around for months into the future and will result in a floor in oil prices at a minimum.

On the supply side a short term risk exists from Nigeria where strikes have been evolving over the Nigerian government’s decision to remove fuel price subsidies. So far there have been no interruptions in supply. However, the Oil Workers Union says it will decide today whether or not to strike and shut down oil output. This is an issue to watch over the next few days as it could result in a short term supply interruption. So far the market is not reacting to this threat.

Yesterday was another positive day for most global equity markets as shown in the EMI Global Equity table below. The Index gained 0.8% over the last twenty four hours widening the year to date gain to 3.9%. Brazil is now holding the top spot with Germany a close second. The US Dow ...which held the top spot all of last year is now in the middle of the pack. So far this year global equities have been a positive support for oil prices and the broader commodity complex.

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