Bearish signals from Europe put pressure on oil

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Mixed markets on Tuesday as signals from Europe were more bearish than they have been in weeks putting some pressure on the euro and thus resulting in a variety of equity markets ending the day lower along with oil closing in negative territory. The API data released late yesterday afternoon (see below for a more detailed discussion) was bearish for crude oil and neutral to slightly bullish for products. The evolving geopolitical backdrop surrounding the EU embargo of Iran is acting as a price floor for crude oil as a minimum and offsetting some of the negativity that would come from a 7.3 million barrels build in crude oil inventories. Whether or not the market will be able to discount a large unexpected build in crude oil if a similar result emerges from the more widely EIA report due out later this morning, is an unknown. However, if the EIA data is in sync with the API outcome I would expect to see more selling in crude oil with both WTI and Brent testing their intermediate support levels.

At the moment the global oil system is in the process of re-optimizing itself as those areas of the world that will abide by the embargo on Iranian crude oil purchases look at alternative supply sources. This logistics exercise will continue over the next several months with the net result of Iranian crude not being used in Europe, less in Japan and several other locations while Iranian lifting's likely to increase to places like China and India. Just yesterday several refiners in India resigned one year supply deals with Iran. Whether or not the market will continue to add a potential supply disruption premium is not know...I do not expect any supply disruption to occur from the action by the US, Europe and others... I still expect the flow to be rebalanced as described above. I also do not expect Iran to take what I would call a very reckless step of trying to block the Straits of Hormuz.

The global equity markets were mixed over the last 24 hours as shown in the EMI Global Equity Index table below. The Index is still higher by about 0.2% for the week with the year to date gains at 7.7%. Most of the western bourses lost ground yesterday while those markets that are not closed for the Lunar New Year in Asia did gain ground after a blowout earnings report from Apple late in the day in New York on Tuesday. Brazil's equity market has been soaring and remains the number one bourse in the Index with Hong Kong (closed) and Germany not far behind. Equity markets were a neutral for oil and commodities yesterday but have been an upside support for the majority of this year so far.

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