Oil inventories become primary as Middle East tensions ease

Wednesday's trading will have two main catalysts that will drive the major global markets. The European summit in Brussels and the Iran & West meeting in Baghdad. The market will be looking for any sign from the Brussels meeting that the Europeans might start to add some form of stimulus to the economy rather than just relying on the austerity programs enacted over the last six months or so. The OECD laid out four steps to start the discussions but Germany has already sent the first shot over the bow by once again indicating they had no interest in any form of Euro Bonds. I suspect this meeting will end like most of them...some progress made with a statement saying that the technocrats will be working to develop a more detailed plan for the larger EU meeting in June. Likely the markets will react negatively to such an outcome.

The nuclear talks with Iran may also be setting up for a progress made communiqué as Iran agreed on Tuesday to allow IAEA inspectors back into the country (although the official deal has not been signed yet).  I think the Iranians will begin to move more toward a limited enrichment program that may be acceptable to the US and the Europeans. The Russians presented a plan that entailed enriching only to the level that is needed for power generation and medical research. I believe that is the direction that the negotiations are likely to move toward. In return the West will have to ease or even eliminate some of the major sanctions... like the EU embargo on crude oil purchases.

If diplomacy makes real progress the geopolitical risk to the Middle East will fall even further and thus result in another sell-off in oil prices. If a real deal looks likely, Brent crude oil could possibly even test the $100/bbl level with WTI falling back in the $80's. Of course the outcome of these situations are nearly impossible to predict with a high degree of accuracy as what looks like a situation heading in the right direction can change in heartbeat and the meetings could end abruptly raising the geopolitical risk quickly. I would not trade based on an anticipated outcome, rather I would sit back, watch and enjoy the show and digest the outcome before moving forward.

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