Oil focuses on supply disruptions over Syria

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Syria remains in the forefront as the main risk asset market catalyst. The U.K. will be offering a UN resolution today that is likely to be vetoed by Russia and China. The U.K. is also scheduled to debate the issues of military intervention in its Parliament on Thursday. The U.S. is still discussing the exact type of strike with most experts expecting a short duration air strike.

The risk asset markets are reacting as they normally do when these types of events are imminent. The U.S. dollar (NYBOT:DXZ13) is stronger vs. most currencies, global equities are lower across the board (see below for more details on equities) and oil prices (NYMEX:CLV13) are higher and holding onto to their gains for the moment. Every geopolitical event that has occurred over the last ten years or so has seen a similar market reaction. Normally once the event happens, and it seems that it is of short duration, markets tend to revert back to more normal value trading levels.

It does not mean I would short the oil market at this point as we do not know what the unintended consequences will be of a strike by the west. We do not know if Iran will retaliate against Israel. We do not know if contagion will spread to the main oil producing countries of the MENA region. All we know at this point in time is the likelihood of a short duration strike is very high and an event that is likely to happen within the next week or so. For now the oil complex should remain firm and those that are in it from the long side should employ trailing stops as the market could move lower strongly when it enters into a reversion mode.

The spot WTI and Brent market are well off of their intraday highs set during overnight trading. The crude oil markets are currently almost $3/bbl off of the intraday high. Oil is holding onto yesterday’s strong gains but for the moment the upside momentum has slowed a tad with today’s gains much more modest than yesterday.

The Brent/WTI spread has also continued to widen with the October spread now approaching the next key technical resistance level of $6/bbl. As has been the case since mid-July when the spread hit parity, the spread has been in a widening pattern driven by the supply side of the equation and hitting the Brent market more strongly than WTI. Certainty the prospects of military intervention in Syria is contributing to the widening of the Brent/WTI spread but the main drivers have been the interruption in supply from a variety of locations around the world. Global crude oil supply is lower by about 3 million barrels per day over the last several months coming from places like Libya, Iraq, North Sea, etc. The spread will remain in a widening pattern until the plethora of supply issues return to more normal operations.

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