Oil balances geo-political and economic risks

Offsetting Risks

Oil prices swung back and forth like a juiced up yo-yo as it tried to balance rising geo-political risk as well as economic risks.

The attack on Hezbollah in Syria killed some elite Syrian troops and Syria and Iran are vowing retaliation. Israel is trying to calm Syria down by saying that Hezbollah, not Syria, was their intended target and the Syrian troops just got in the way.  The UN said it is possible that Syrian rebels were the ones that used chemical weapons, adding to the uncertainty. The Obama administration doubts that but it does mean there is uncertainty about what to do. Dow Jones says that U.S. and European officials said the U.S. has stepped up talks with Britain and France on possible military options should the West reach a consensus to intervene.

Yet oil also has to deal with the possibility of another crisis in Europe. The IMF raised concerns that Greece may need another bailout and that sent oil tanking. There is nothing like the fear of a Eurozone break up to tank the oil market.  Yet overnight a better than expected German manufacturing number is giving the market a bit of hope as well as a bounce in the euro. The Aussie is falling hard after a rate cut as they react to soft Chinese demand for commodities as well as the aggressive monetary policy.

On top of that there were reports that Saudi Arabia is raising oil production. The Saudis increased production by 180,000 barrels per day, a four-month high. I guess you better sell it while the market is hot or at least before someone takes your market share.

The products also got a boost as Brent crude soared against WTI. Ultra-low sulfur diesel got a boost on demand expectations as the weather forecasts that should favor some major planting over the next few weeks.

Natural gas is trying to bottom below $4.00. The FT is reporting that the Obama Administration is going to come out in favor of natural gas exports. The Washington Post suspects it is because U.S. officials believe that being seen to restrict exports for the benefit of domestic industry would send a terrible signal about U.S. support for free trade. The Post says that restricting LNG exports may put the United States in a contradictory position vis-à-vis cases it has brought to the WTO, specifically against China, for limiting the export of rare earths and other metals. The Post says that the United States has been concerned for quite some time about China's chokehold on the global supply of rare-earth metals and has been appealing to the World Trade Organization to rule against China's various export restrictions. Those arguments sound a lot less convincing if the Department of Energy is rejecting licensing applications for natural gas exports at the same time.

As far as the risk-on vs. risk-off trade, natural gas seemed to zig when oil zagged but the relationship was not perfect.

Good news for Chicago drivers! Reuters reports that BP Plc plans to begin the start-up of an upgraded crude distillation unit at its 405,000 barrel per day (bpd) Whiting, Indiana, refinery by the end of May, according to sources familiar with refinery operations. The start-up of the CDU, called Pipestill 12, could slip into June as BP is being careful to avoid rushing the work to prevent a mishap that could damage the centerpiece of the $4-billion upgrade, the sources said. BP shut Pipestill 12 in November to begin the project, expected to lift the refinery's capacity to run Canadian crude oil from 80,000 bpd to 350,000 bpd.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

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