Oil retreats after concerted government moves

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Can words describe the fragrance of the very breath of Spring?

Neltje Blanchan

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The market finally paid a bit of attention to the simple fact that at the moment (as I have been writing in the newsletter) there is no shortage of oil in the world today. The Saudi Arabian Cabinet said that it will be working with other producers to "restore oil prices to levels that are fair for producers, consumers and the oil industry. The Saudi Oil Minister went on to say on Monday that there is no shortage of supply in the market...according to a report by Reuters. He said that Saudi Arabia has ample surplus crude oil capacity to raise production another 2.5 million barrels per day if it is needed.

As I have been pointing out for some time oil stocks are growing and supply from Saudi Arabia and elsewhere are more than offsetting the loss of supply from Yemen, Sudan, Syria and even Iran. Saudi Arabia has been producing at a rate of close to 10 million barrels per day since late February to early March. In addition today the US announced that it has decided to grant exemptions to Japan and 10 EU countries allowing them to import some quantity of Iranian oil. The US said they are planning on penalizing countries unless they show that they have made a significant reduction in their Iranian oil purchases in the middle of the year. In essence the US has watered down the sanctions for now. This will change the market sentiment from one that has been pricing in an almost immediate potential supply disruption from Iran to one that it will be a wait and see mentality. In addition the Kuwaitis said that the Iranian have vowed to not attempt to close the Straits of Hormuz.

With all of these announcements hitting the media airwaves on the same day it is obvious this was an orchestrated plan that likely started to be put in place last week when Obama met with Cameroon (again in my opinion). For the moment the edge is off a tad and with the prospects for negotiations to begin at some point the likelihood of any military action in the near term is declining. For now the risk premium embedded in the price of oil...which widened significantly since the Jan. 23 announcement by the EU to embargo Iranian crude oil purchases has started to recede and will likely continue to recede barring a notching up in the war of words between both sides. What this change of strategy by the US and the West means (in my opinion) is there is a greater concern over the short term impact of high gasoline prices (during an election year) and the potential impact on the economy rather than the short term need to reign in Iran's nuclear ambitions. The US blinked and now we will have to see if Iran gives some ground. Also it will be very interesting to see how this all plays out with the Israelis. They are the wildcard.

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