World Economy

Europe remains the main risk asset price driver, but other things are happening around the world and some of these are also working their way into the mix as a market price driver. Overnight the Chinese government cut bank reserve requirements by 0.5% from December 5th onward as China now seems to be moving toward an accommodative monetary policy. The move by China was welcomed in the market place as China now seems to be joining the developed world economies and slowly starting to stimulate the largest economic growth engine in the world.

European Finance Ministers agreed yesterday to guarantee as much as 30% of new bond sales from problem member countries to enhance the regions bailout fund and to enhance its ability to cap yields by also buying bonds. In addition the Finance Ministers are seeking a larger role for the IMF and the ECB in fighting the debt problems. Europe is continuing to move forward in trying to solve their debt issue problems with the market still somewhat skeptical that it is even a solvable problem in the short term. But at least for the moment the panic mentality has been somewhat abated. The cloud of uncertainty remains in place, but it is not getting any larger at the moment.

On top of all of the economic issues around the world, the geopolitical risk in and around the greater Middle East is continuing to widen. At the heart of the problem is the evolving nuclear situation in Iran and the ramifications of many direct and indirect actions slowly taking place by the West. A new round of sanctions by the U.S. is moving forward that are designed to make it more difficult for Iran to receive payment on its crude oil sales. China, Japan and India, along with the EU region, are the main buyers of Iranian crude oil. In addition to the U.S. sanctions, the EU Foreign Ministers are meeting tomorrow to discuss the issue of Europe embargoing Iran crude oil from the region. Whether or not they will do it remains to be seen, but if they do impose such an embargo, we can expect the Saudis to step up and replace those barrels. It is not likely to see a sustainable price spike in the event that the Europeans embargo Iran, as Saudi oil will offset and solve the logistics. However, if the Saudis do not step up to the table (a low probability) then of course we will see a price spike of some magnitude.

Even with protesters moving into the UK Embassy yesterday, oil prices have been relatively calm with only a minimal risk premium currently embedded in the price. The fact that Iran and Syria have moved further into the forefront of events that could result in a potential supply disruption they will at a minimum keep a floor on any major price selling at this time.  Also with the fragility of the global economy, especially Europe, along with the growing geopolitical risk in the Middle East, the December 14th OPEC meeting is going to be very interesting to say the least. We are likely to see a clash of perspectives between those calling for a cut back to pre-Libyan civil war levels and those suggesting no change. It is likely there will be no change at this time, especially with Brent still well over $100/bbl and WTI within shouting distance of a triple digit price level.

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About JWM Energy Consultant
Professional Energy Consultant. I advise large energy-users on procurement strategies to reduce electricity and natural gas costs.

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