Yesterday, it was such an easy game to play but now the IEA had entered and made it so much harder and it looks as though they’re to stay.
The early morning entry of the IEA into the market pricing of oil has given rise to a slew of conspiracy theories. I care not a damn about the theories but want to analyze the impact of the action and the effect upon the markets. Government actions, no matter how ill-advised, are to be understood and analyzed in the real and potential outcome on world markets.
The Obama Administration has been floating the idea of opening the SPR in an attempt to break the back of financial speculation in the energy and food sectors. It appears that the unilateral move by the Obama Administration would not go down well as many in Congress and elsewhere would have attacked it as an electioneering gimmick to drive down gas pump prices and attack the “locusts” on Wall Street. It seems that the move then became to internationalize the decision by using that “august” body the IEA.
In order to get the major participants to go along I am wondering what deals were made and what potential impact it will have on markets as we go forward. One analyst on TV I think had it very correct: Whoever crafted the action waited until the price of oil was already moving lower and when WTI was at the 200-day moving average, released the announcement so as to get the most price action, as so many long-term traders are geared to that 200-day moving average.
The rationale was that the Libyan crisis had removed 140 million barrels of oil from the market so the supply had to be provided by an international consortium of reserves. A grand alliance and a good headline. Interesting, though, that the U.S. contribution was almost exactly what the BUSH ADMINISTRATION released post-Katrina.
I am not making a statement about the Obama Administration, only trying to understand the market impact. The fact is that POLITICIANS OF ALL LABELS will use whatever tools are at their disposal to maintain power.
This type of action of not from the book of Saul Alinsky but from Richard Nixon. It is incumbent upon us as traders to analyze the events and look toward its potential impact:
1. Did Bernanke know ahead of time?
2. Did the French and British, who are struggling in Libya, get any assurances on American aid and efforts in the NATO operation?
3. The Saudis evidently knew because of the early leak and recantation. What is their payoff?
4. If the action is deemed to be directed against the Iranians for their stance in OPEC, what will be the Iranian and Venezuelan response?
5. Impact upon markets: Everything initially broke hard in a classic deflation, risk-off scenario, which is what the authorities hoped to accomplish.
6. Grains and sugar rallied back by their closes as did the EQUITY markets
7. WILL THE IEA’S ACTION BE TRANSITORY AS THE GLOBAL SUPPLY/DEMAND EQUATION FOR COMMODITIES HAS MANIFESTLY SHIFTED?
8. WILL WE FIND THE INFLUENCE OF CHEAP MONEY IN AN UNDERPERFORMING GLOBAL ECONOMY IS THE MOST POWERFUL STIMULANT IN THE GAME?