A pessimist sees the difficulty in every opportunity and optimist sees the opportunity in every difficulty.
Oil lost some of its upside momentum on Tuesday led by declines in the spot WTI contract with Brent crude remaining relatively steady on the backdrop of freedom protests around various Middle East countries. WTI has pretty much decoupled itself from the rest of the energy complex with Brent and refined products all trading with a risk premium associated with the possibility that oil supply could be disrupted as the freedom or democracy protests spread throughout the largest oil producing region in the world. As I outlined in yesterday's report the countries currently at risk are Bahrain, Algeria, Iran and Yemen where protests have continued. The total volume of oil from all of these countries combined is about 5.6 million barrels per day which exceeds the current EIA estimated surplus crude oil capacity of 4.65 million bpd in OPEC by about 500,000 bpd. Also as I mentioned yesterday the majority of the surplus crude oil capacity (3.76 million bpd) sits in Saudi Arabia which is also a potential hot bed as it is a ruling monarchy state. Whether or not the protests in any of these countries will continue to evolve or even spread to other areas like Saudi Arabia or Kuwait is a very big question. Oil prices…including WTI are back in positive territory in overnight trading on a combination of Geopolitics of the region as well as a surprise decline in US crude oil stocks reported in last night's API inventory report (see more details below on inventories).
As has been the case for the last several days the external markets have not been overly supportive for oil prices or the broader commodity complex. Overnight the US dollar has declined versus most major currency pairs with US Dollar Index now down about 0.3% and mildly supportive for oil and commodity prices. Most major currencies have been trading in a range for weeks and at the moment it does not look like this pattern will change anytime soon. As such I do not expect currencies to be a very strong or weak price drive over the short term.
On the equity front global equities have continued to add value in overnight trading as shown in the EMI Global Equity Index table below. The EMI Index has added another 0.1% in the last twenty fours and is now 1% higher for the week resulting in the year to date gain widening to 0.2%. Most equity bourses did not follow the downside correction seen in the US market on Tuesday with both Asia and Europe currently in positive territory. Brazil is now the only bourse still in negative territory for 2011 with the developed world markets still sitting on top of the 2011 winner's column. Market participants are treading carefully in most equity arenas as inflation is showing up in the developed world while it is clearly already impacting the emerging market world. Much like the currency markets discussed above I do not see equities being a very strong or weak price driver for oil and commodity prices in the short term.
The main price drivers for oil in the order of influence currently are:
· The evolving freedom movement protests in the oil rich Middle East
· Current fundamentals with inventories as the main gauge
· The view of the global economic recovery
· The impact of inflation fighting in the emerging market world especially its impact on commodity consumption
· Inflation risk in the developed world