Oil inventories in driver’s seat as geopolitics secondary

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Even as equity markets in the U.S. hit new all-time high levels trading, activity in the oil complex was muted with limited price gains that were almost entirely driven by a light round of short covering. The relatively balanced global fundamental situation has been keeping oil prices under control as the market has been in a short term downward trading channel since breaking through key technical support levels in the middle of February. Even the growing list of geopolitical events that would have normally sent oil prices to higher levels has been mostly ignored by market participants.

Both the spot WTI and Brent contracts are in a slowly evolving technical bottoming pattern with both contracts still below key resistance levels, However, both have held above support levels for the last three or four trading sessions. On the other hand heating oil actually rose strongly and is now trading above its resistance level indicating that this commodity has put in a short term bottom and is likely to move higher. RBOB gasoline has also been going through a bottoming pattern and is currently trading around its resistance level. Overall the oil complex may have put in the lows for the current downward move.

On the geopolitical front there has been a lot of rhetoric and tough talk coming from the U.S. and Israel regarding Iran's nuclear program. Israel has said Iran has crossed the line in its program and is taking advantage of the talks with the west to continue to progress closer to its goal of nuclear weapons. Both Secretary Kerry and Vice President Biden clearly stated over the last several days that the military option is on the table and the U.S. would continue to do what it had to do to prevent a nuclear Iran. Even former Secretary of State Kissinger said a nuclear crisis around Iran is getting closer. The geopolitical risk to the oil producing regions of the Middle East is moving back into the foreground and if the rhetoric and tough talk continues market participants are once again going to start to add to the risk premium in the price of oil.

Yesterday Venezuelan President Hugo Chavez succumbed to his two year fight with cancer. Venezuela is now on the radar as the transition to a new election and thus a new leader could create instability and uncertainty over the next several months. The current vice president is the current front runner with the opposition party likely to make a strong run in the upcoming election. The military and police have been put on alert. The government leaders continue to view external forces as a potential cause of instability and yesterday they expelled two U.S. diplomats accusing them of spying.

Although Venezuela is not as large an exporter of oil as it was back in 2002 during the attempted coup, it is still a factor and any interruption in oil supply will result in a short term upward move in oil prices. We need to watch what evolves over the next month or so.

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