Upside risks abound but the fear of tapering may keep oil (NYMEX:CLU13) down. Turmoil in Egypt and an active Atlantic as far as storms go provided the upside while strong economic data provided the downside. Oil backed off after a stellar weekly jobless claims number, a hot CPI and a housing confidence number that suggests that builders are getting just giddy. Yet when a speech by the President was announced and the cancellation of U.S. Egyptian military exercises, the markets was reminded of the risks.
Today the Muslim Brotherhood is calling for a day of rage after burning churches in response to the military crack-downs. The President said that “We appreciate the complexity of the situation. While Mohammed Morsi was elected president in a democratic election, his government was not inclusive and did not respect the views of all Egyptians. We know that many Egyptians, millions of Egyptians, perhaps even a majority of Egyptians were calling for a change in course. And while we do not believe that force is the way to resolve political differences, after the military's intervention several weeks ago, there remained a chance for reconciliation and an opportunity to pursue a democratic path. Instead, we've seen a more dangerous path taken, through arbitrary arrests, a broad crackdown on Mr. Morsi's associations and supporters and now, tragically, violence that's taken the lives of hundreds of people and wounded thousands more.” He went on to say that “We deplore violence against civilians," Obama said at his vacation home on Martha's Vineyard. "We support universal rights essential to human dignity, including the right to peaceful protest. We oppose the pursuit of martial law."
Brent Crude has gained mostly from the turmoil as U.S. production and a winding down of the summer driving season is giving the U.S. market more comfort from a potential supply shock. Products in the U.S. continue to get a boost from not only Egypt but uncertainty surrounding Libya.
Bloomberg News reports “One of the most amazing things about the Libyan Revolution was just how quickly the country’s oil industry rebounded from the chaos and violence of 2011. After bottoming out at only 45,000 barrels a day in August that year, after having fallen 97% since the previous January, Libya’s oil production was back near full capacity—1.6 million barrels a day, by last summer. That’s a huge success by any measure.
Now, nearly two years after the death of Muammar Qaddafi, Libya is backsliding into chaos. Striking workers angry about government corruption and low wages have attacked the engine of the country’s fragile economy: The export terminals and oil fields, many of them state-run that hold Africa’s largest known crude reserves. To press their demands, roving militias have begun seizing and shutting down the terminals, leading to a precipitous drop in Libya’s precious oil exports, which account for practically the country’s entire gross domestic product. For more than two weeks, Libya’s exports have basically flat lined as all but one terminal have been shut-in.
Even more troubling is the news that production is starting to nose dive, too. This week, Libyan Oil and Gas Minister Adbulbari Al-Arusi said Libya is pumping only about 650,000 barrels a day. “A tragic situation,” Al-Arusi told reporters at a news conference in Tripoli on Tuesday. Adding economic weakness to a situation of social and political upheaval is never a good sign.”
Gold and silver soared despite the taper threat. Maybe John Paulson wish’s he waited a bit longer to dump those SPDRs. CPI came in on the hot side suggesting that finally the inflation that the Fed was dying to see may be happening. Yet the World Gold Council report did suggest a physical market that was on the path of increasing tightness with booming demand and a slowing production. The recycle market a major portion of the supply chain is also drying up. Mine production in the quarter was 4% higher than a year ago, at 732t. Recycling fell 21%, leading to a total supply that was 6% lower than a year ago. On top of that capital spending cuts and small mine closes in this coming quarter will tighten supply even more. How many Cash For Gold Stores have you seen close recently?
Platinum and palladium look strong as well. Labor issues and mine closures and an uptick in demand will lead to worries once again that demand will outstrip supply. The only way to solve that is a meltdown in the economy, much higher interest rates or sharply higher prices for the metal.