Crude

The latest in a series of reports evaluating the future of the energy markets, especially in the context of the increasingly inevitable Iranian conflict, may just be the best and most comprehensive one (not just because it looks at the commodity from an "Austrian" angle). In 82 pages, Austrian Erste Group has extracted the key aspects and variables for the world oil market and come up with a simple conclusion: "nothing to spare." To wit: "We see the risks for the oil price heavily skewed to the upside. At the moment, the market is well supplied, but the smouldering crisis in the Persian Gulf could easily push oil prices to new all-time-highs should it escalate. We believe that new all-time-highs can be reached in H1, at which point we could see demand destruction setting in. We forecast an average oil price (Brent) of USD 123 per barrel between now and March 2013...The latently smouldering Iran crisis seems to be close to escalation. The most recent manoeuvres, ostentatious threats, sanctions, embargoes and the shadow war currently ongoing, have heated up the situation further. It seems we may soon see the last straw that breaks the camel's back. Even though Iran could probably only maintain a blockade of the Straits of Hormuz only for a very limited period of time, the consequences would still be dramatic. The oil price would definitely set new all-time-highs and could reach levels of up to USD 200." Enjoy those price dips while you can.

Markets are exhibiting very risk-averse behaviour ahead of the US open, with European equity markets making heavy losses across the board with flows into the safer assets. This follows Greece dominating the headlines once again, with a report from the IIF warning of dangerous ramifications for Europe should Greece default. These reports got the European session off to a bad start, with losses made throughout the morning. Market talk of a delay in the Greek debt swap deal deadline has also been circulating, however this was swiftly denied by the Greek Debt Agency chief as well as the Greek Finance Ministry, although this failed to reassure markets and they continue on a downward trend into the US open. Eurozone GDP data released earlier in the session showed a contraction in the last quarter of 2011, although expected, this has reignited concerns of a recession in Europe. The ECB have recorded yet another record level of deposits from European banks in its overnight lending facility, with institutions depositing EUR 827.5bln on Monday night.

Swiss money manager and long term bear Marc Faber, aka "Dr Doom", says political risk in the Middle East has increased significantly with war between Iran and Israel “almost inevitable”, and precious metals and equities investments offer some safety. "Political risk was high six months ago and is higher now. I think sooner or later, the U.S. or Israel will strike Iran - it's almost inevitable," Faber, who publishes the widely read Gloom Boom and Doom Report, told Reuters on the sidelines of an investment conference. Brent crude traded near $123 per barrel in volatile trade on Tuesday on fears of a disruption in Iranian supplies. Israeli Prime Minister Benjamin Netanyahu showed no signs of backing away from possible military action against Iran following a Monday meeting with U.S. President Barack Obama. "Say war breaks out in the Middle East or anywhere else, (U.S. Federal Reserve chairman) Mr Bernanke will just print even more money -- they have no option...they haven't got the money to finance a war," said Faber. "You have to be in precious metals and equities ... most wars and most social unrest haven't destroyed corporations - they usually survive," he said. He said that Middle East markets had largely bottomed out, though regime changes from the Arab Spring revolutions were unlikely to be investor-friendly.

Asian equities too a hit, posting their biggest two-day loss this year. The MSCI Asia Pacific Index dropped 1.2%. The losses were situated in the Hang Seng, which fell 2.2% and China’s Shanghai Composite, which declined 1.4%. Meanwhile, Europe is off 1.6% in the aggregate after the second take on Q4 GDP confirmed the 0.3% drop from the initial estimate. And, after yesterday’s sell-off, equity futures are pointing to a weaker open at home across the major indices driven in part by concerns that the Greek PSI will not get the required 75% participation as reported here yesterday. In the US, government bonds are in rally mode with the 10-year Treasury note yield down 4bps, to 1.97%; the long bond is rallying 5bps, to 3.10%. Across the pond, government bonds are performing as one would expect. Benchmark German bunds are rallying 4bps, to 1.78% while France, Italy, and Spain are selling off anywhere from 5 to 9bps. In the FX market, the US dollar is enjoying a flight to safety bid against major currencies. The DXY index is up 0.5%. Not surprisingly, with risk being taken off the table, commodities are taking a hit. WTI crude oil is down 60 cents, to $106.10 per barrel. Industrial metals are taking a hit too; copper is off 1.6% to its lowest level since mid February. In Europe, the LTRO continues to not work at all as the ECB deposit facility rose to a new all time record of €827 billion as cash parked with the ECB is not being used for any other purpose, and the net money from LTRO 1 and 2 is now less than the cash added to the ECB from Europe's banks.

All you need to read.

Just a headline from AP for now:

• Sen. McCain calls for US to lead 'international effort' to begin air strikes on Syria.

Looks like operation "Enduring Brent Crude Freedom" is about to commence.

European equity indices are exhibiting signs of risk averse behaviour, with financials and basic materials performing particularly poorly. This follows weekend reports from ECB sources that the central bank does not believe voluntary participation in the Greek debt swap deal will be sufficient, and the CACs will have to be invoked. Markets are also reacting to the weekend press from Germany, claiming the Troika believe Greece will require a third bailout of around EUR 50bln by 2020, however these reports were denied by a German spokesman earlier in the session. European Services PMI data released earlier in the session fell below expectations, compounding the already cautious market behaviour. European Banks have parked a fresh record EUR 820bln with the ECB overnight, showing further evidence that the LTRO has loosened liquidity constrictions in the continent. Commodities are making losses ahead of the North American open following overnight news that China have made a downward revision to their GDP target for 2012. Spot gold is trading down around 0.9% and WTI and Brent crude futures have been making a loss for most of the session so far, however oil has made positive movements in recent trade. These negative movements in commodities are also weighing down upon the commodity-linked currencies, with AUD particularly making losses on the session.

All you need to read.

When it comes to reporting the news, Reuters ability to get the scoop first may only be rivaled by its ability to "spin" analysis in a way that will make a normal thinking person's head spin.  Such as the following piece of unrivaled headscrathing titled "The good news behind oil prices" whose conclusion, as some may have already guessed, is that "the surge in crude oil is looking more like a harbinger of better days." Let's go through the arguments.

It was only sugar water anyway. 

On Friday, we quantified the biggest losers in the case of a sustained oil price shock, and were not surprised to find that the US leads the way with about a 0.9% hit to GDP for every $10 rise in crude prices (compared to about 0.4% for the entire world). Today, via Goldman we look at the flipside and while acknowledging that in absolute terms the world will suffer should crude prices sustain their move higher, there will be relative winners. From GS' David Kostin: "Our oil convergence monitor tracks the relative performance of the Energy sector vs. S&P 500 against the price of oil (measured by the 2-year oil swap). Currently, Energy equities are about 1.5 standard deviations cheaper then the oil price would suggest (based the relationship over the past three years (see Exhibit 4). The divergence has remained stable during the last two weeks although the Energy sector outpaced the S&P 500 by 160 bp during February (5.9% vs. 4.3%). Outside Energy, the Metals & Mining and Engineering & Construction industries show the highest sensitivity to oil prices." What is strange is that the biggest loser by far to an oil shock is the Consumer Discretionary sector, which continues to plough on, completely oblivious of absolutely everything, even as the Dow Transports have decoupled from the broader market, purely in hope that the iRally will continue and lift all boats with it, when in reality every incremental dollar spent for iTrinkets saps the already tapped out US iConsumer even more, with less marginal purchasing power left for other discretionary purchases. Then again, good luck trying to talk any sense into the central bank playground known as the stock market, which will do whatever it wants for as long as it wants, until it doesn't.

What is one sure thing sure to set triggerhappy warmonger fingers in the US and Israel on Defcon 1 more than the word Iran? The words Iran and North Korea. How about three nouns that will send crude soaring by at least $10 the second a CL trading algo sees them fly across Bloomberg? Try "Iran" "North Korea" and "Nukes." And if the following report just released by the Wiener Zeitung is even remotely correct, then Israel, the military industrial complex, and crude are all about to go ballistic, not necessarily in that order.

The results from Iran's parliamentary election, whose outcome will have virtually no impact on the country's foreign, nuclear or Iran policy, and thus change the country's course vis-a-vis Israel and the US, are in, and following a supposedly high turnout as big as 64% which critics have blasted as a sham (unlike American low turnouts which are 'pristine', yet where both "opponents" end up paid representatives of the banker class) has seen support for president Mahmoud Ahmadinejad's party slide, at the expense of a surge in popularity for the ultra conservative Supreme Leader Ayatollah Ali Khamenei. Reuters summarizes the results as follows: "Interior Minister Mostafa Mohammad Najjar put the turnout at 64 percent after more than 26 million votes had been counted, telling state television the Iranian nation had disappointed its enemies by voting in such numbers. The figure was close to the 65 percent predicted for weeks by hardline conservative leaders and media. Najjar said 135 seats had been won outright so far, with 10 going to a run-off. Final results were not expected on Saturday. According to a Reuters tally of the results announced in 126 seats, 81 went to Khamenei supporters, 9 to Ahmadinejad's faction, 7 to reformists and 7 to independents, with the allegiance of the remaining winners unclear." However, as noted above, "the vote will have scant impact on Iran's foreign or nuclear policies, in which Khamenei already has the final say, but could strengthen the Supreme Leader's hand before a presidential vote next year. Ahmadinejad, 56, cannot run for a third term." Instead, it is all about internal politics and is a buildup to next year's presidential election in which Ahmadinejad can not run, thus opening the door for Khamenei to take all power. Needless to say, if the "western" world thinks the current conservative president is bad, his ultra-conservative replacement will hardly make things better.

Natural gas prices are depressed and expected to remain so for the short to medium term, so investing in natural gas options or a natural gas exchange-traded fund is not likely to bring home the big bucks anytime soon. Domestic natural gas equities are an even riskier idea - most producers are scaling back production and selling assets as they hunker down in preparation for a tough few years. In this case, the way to profit is by understanding how natural gas' changing role is impacting North America's energy machine as a whole. Cheap natural gas is prompting utilities to switch from coal to gas where possible. The confluence of cheap natural gas and a risky global economy has droves of investors turning their backs on green energy, the sector that was such a market darling only a few years ago. Farther down the road, North Americans are debating - and in places implementing - a range of strategies to take advantage of the continent's newfound abundance of natural gas, from natural-gas-powered transport trucks to exportation of liquefied natural gas (LNG). Isaac Newton showed us that for every action there is an equal and opposite reaction. That is why every downside force in the energy sector creates upside opportunities elsewhere. The challenge is finding them. It takes an understanding of the entire global energy machine to figure out what areas are benefitting from the changing landscape.

Over the past 5 months, the only reason the US market, and this economy has outperformed the world (or "decoupled" in the case of so-called US fundamentals) is because the trillions in incremental liquidity from generous central planners have homed in on US equities like a heat seeker, in the process boosting confidence, and in a reflexive fashion, making consumers believe that things are getting better (for producers of printer cartridge maybe, everyone else just keeps getting worse off in real, not nominal, terms). Paradoxically, the trillion plus injected into the system from the ECB, ended up helping not Europe, but the US. However, as every action ultimately has an equal an opposite reaction, the recent US "renaissance" has also sown the seeds of its own destruction, because one of the side effects of a massive liquidity reflation is what has happened in the energy markets where the crude complex trades at all or near all time highs. However, as the following chart from UBS shows, it is the US which has the most exposure to that other side effect of soaring liquidity: surging prices. While the number is fluid (economist humor), every $10 increase in crude prices, cuts US GDP by 1%, and less than that in Europe and the ROW. As noted yesterday and today, "strategists" have already started trimming their GDP forecasts. How long before we end up seeing already weak growth turn negative as a result of the most recent central planning reliquification experiment? Because it will - central intervention always leads to adverse consequences in due course. Only this time, corporate profits will not allow the economy (read the markets) to pull itself up by the bootstrap, as they have topped and are now sliding lower.