Oil and Demand Destruction

The ratio of Oil prices to World GDP has reached to a record level. Its a classic case of demand destruction where these high prices would end up hurting economies and killing the price surge. Moreover High prices would also make the oil producing countries to produce extra and glut would again destroy the prices. But right now its difficult to guess when and how...

Source: FT

Egypt and Oil

The crisis in egypt is making oil shooting through the roof. The vents in Egypt will not only decide the fate of the nation but also the middle east which is the main supplier of the oil

WSJ 's take

The turmoil in Egypt is reverberating around the world, battering stock markets, driving up oil prices and raising questions about whether the rising cost of crude could slow the global economy.

The Egyptian stock market is expected to be closed Monday, after shares fell 17% late last week. Most Persian Gulf markets fell Sunday, with Dubai tumbling 4.3% and Oman 3%. The Saudi Arabian stock market ended up 2.5% after sliding 6% on Saturday. Prices for U.S. benchmark crude futures leapt $3.70, or more than 4%, to $89.34 a barrel on Friday. In Asian trading early Monday, U.S. oil futures were trading up 87 cents, or 1%, at $90.21 a barrel.

J.P. Morgan economists estimate that a 10% increase in oil prices, if sustained, would slow global GDP growth by a quarter-percentage point. They expect global output to rise at a 3.6% annual rate this quarter.

"The principal concern is that civil unrest spreads to Middle Eastern and North African oil producers, producing significant reverberations in financial asset prices and confidence," J.P. Morgan said in a research note.

For the U.S., the surge in oil prices comes just as the economy appears to be growing at a pace, which, if sustained, could bring down unemployment in the months ahead. Several European economies are growing more slowly or even contracting due to the continuing effects of the financial crisis.

About a million barrels a day of crude and refined products are shipped northward on the Suez Canal, according to the U.S. Department of Energy. A separate pipeline across Egypt carries 1.1 million barrels a day between the Red Sea and the Mediterranean. Together, that is roughly 2% of global oil production.

Closing the Suez Canal would force ships to seek other routes, adding about 10 days to the time it takes for Mideast oil to reach the U.S. and 18 days for the trip to Northern Europe. That alone would push up crude prices even if supplies were adequate due to emergency reserves around the world.

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WTI_Brent Spread

The illustration suggests that whenever WTI/BRN breaks the zero barrier and becomes negative, it falls atelast to a level of - 2.

The Week That Was

The markets opened on weak note with issues plaguing the market like

o Bank of Spain's takeover of a savings bank called Cajasur and potential merge of 4 other banks unveiled problems in the country's banking system
o Tension between North Korea and South Korea after North korea sunk a South Korean vessel killing its crew
o US dollar, Japanese yen and gold surged while stocks, euro and energies slumped.

But things changed when

o OECD upgraded its GDP growth forecasts for 2010 and 2011
o China’s commitment to Euro zone holdings

Though on Friday markets were weak as S & P downgraded Spain from its AAA rating


CRUDE OIL

After rallying to a 2-week high at 75.72, crude oil price retreated more than -$1/bbl. The front-month WTI contract ended settled at 73.97, down -0.78%, on Friday. On weekly basis, the contract surged +5.61%, halting the severe selloff since May 3. In May, WTI futures slumped -14.1%.

Crude surged on OECD GDP revision and most importantly the much awaited drawdown in Cushing stockpiles. As driving season approaches and refinery utilization inches up, it can give a fillip to Crude and WTI – Brent




Crude oil fell more than 20 % from its high. Technically if any asset class fall more than 20 % from its highs enters a Bear Market. I believe crude oil also has entered a short term bear market or the upside looks limited for the time being. So any retracement to Fibonacci levels can be a good shorts

WTI BRENT

Finally WTI- Brent spreads managed to see the positive territory
the three primary reasons were
1. Driving season which pushes the demand for gasoline in US
2. Refinery Utilization going up after their maintenance is over
3. As Euorope Crisis deepens the demand for Brent Crude may be affected which will keep it at a discount as compared to WTI crude

An illustration of cushing levels and Wti Brent Spreads



The Gasoline Demand is also looking strong for this year