As oil in recent weeks gave into the weight of overwhelming supply, it now will find support from rising risk. A massacre in Syria and the perception that Iranian nuclear talks will fail has added a risk dynamic that has been absent in recent weeks. Add to that talk China may act to stimulate its slowing economy and the pro-austerity party in Greece is leading in the polls. It seems that the recent dramatic drop in oil has come to an end.
Syria’s slaughter over the weekend may mean that the hand of US retribution may not be restrained. While Israel blames Iran for the problems and Russia, unmoved by the bodies piling up, has decided to back the murderous regime, the odds of some type of a conflict continue to rise. It seems when it comes to politics Russia likes to back those that kill their own people.
The Wall Street Journal reports that, “recent hopes that Iran's leadership might be willing to compromise with world powers on the country's nuclear program have soured in recent days after talks in Baghdad failed to bear results. Iranian officials took a harder tone this week, saying the Islamic Republic wouldn't halt enrichment of uranium or reduce it below a threshold—20%—that the West says can ultimately be ramped up to nuclear-weapons grade. Iran insists that its nuclear program is for peaceful purposes. The central demand of the international community in Baghdad during talks was for Iran to freeze enrichment of uranium, which Iran refused to do, leading to an impasse in the talks.”
The Journal says that the “new rhetoric from Iran marks a departure from weeks leading to the negotiations in Baghdad. Iranian officials had softened their remarks and even suggested an opening for a compromise whereby Iran would lower enrichment to a 5% level in exchange for easing of crippling economic sanctions that the West has imposed."
If the market starts to focus on these risks, then the conversation in the oil market will turn away from current oversupply and overproduction to global spare capacity. According to the Energy Information Agency global spare crude oil production capacity is at a paltry average of about 2.4 million barrels per day in the first quarter of 2012. That is down about 1.3 million barrels per day from the same period in 2011. That means that spare crude oil production capacity is now less than 3% of total world crude oil.
The other factor for oil is the slew of economic indicators that will be released this week including Friday's US unemployment report. This report will be critical not only to get a sense of US oil demand expectations but also because it may also give us an indication as to whether President Obama will continue to sink in the polls.