European Rescue Restores Hope

Jim Brown
 
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The large-scale rescue plan for the Eurozone appears to have eased the global market tensions and fears over a drop in oil demand from economies spiraling down the drain. Greece was the immediate focus but the plan would also help with future problems with Italy, Ireland, Portugal and Spain.

The rescues plan brought the Eurozone back from the brink of disaster at least for the time being. The Greek problem will probably return to haunt them in 6-12 months but at least for now it seems to have faded from the headlines.

With a Greek default out of the headlines and anticipation of a debt limit deal in the U.S. the WTI futures traded briefly over $100 and Brent to $119.25. That celebration may have been premature.

The U.S. debt limit deal has yet to be found. 11th hour meetings, press conferences and sound bites failed to assure investors that a compromise would be reached. As of late Sunday night there was no deal and House Speaker John Boehner said it would likely be Monday before a new plan would be presented to the House for debate.

Reportedly the plan would be smaller and increase the debt limit by $1 trillion while cutting spending by slightly over $1 trillion. This would require the entire debt limit discussion to be revisited again in 2012 and the administration is strongly against that because of the negative implication for the election cycle.

Senate leader Harry Reid is reportedly preparing his own $2.4 trillion deal. The gang of six deal is still on the table as is the original deal Boehner and Obama tentatively agreed to last week. There is no shortage of proposals but a shortage of agreements.

The lack of a deal pushed oil prices lower on Sunday night while sending gold prices to $1624 and a new record. The S&P futures declined -19 points at the open but then recovered to about -10 at 8:PM ET.

Lawmakers need to flush this political theater and move on to more important projects. The debt limit has been raised 74 times since 1960. It was raised 8 times during the Bush presidency and 3 times already during the Obama presidency. Three times the limit was hit and spending had to stop. That was 1985, 1995 and 2002. In 1995 it took five months for a resolution and the U.S. did not default on its debt and the global economy did not implode. This is a political crisis not a monetary crisis. The size of the debt will eventually cause severe problems in the U.S. but it does not have to be this week. That is an entirely different discussion.

There was a lot of commentary last week over the IEA oil release with lots of implied threats of a second announcement. However, although the IEA said it is prepared to "augment" the initial release of 60 million barrels, the initial intervention combined with the higher output from OPEC will for now "substantially cover" the loss of exports from Libya. What a load of bull.

The loss of Libyan oil is now over 200 million barrels. There is no way a limited release of oil products including gasoline and diesel suddenly erased the impact of Libya. What the IEA was tactfully saying, "we made a mistake" when we poked the sleeping OPEC lion they made it seem like it was mission accomplished. They then said no further releases would be necessary. That took the uncertainty pressure off the market and allowed traders to reestablish positions.

There is a new drain on OPEC supplies about to begin. Iran has been selling India 400,000 bpd for a very long time. With the new sanctions in place the Reserve Bank of India halted a clearing mechanism that allowed India to pay Iran for the oil. Iran continued to ship the oil and India now owes Iran more than $5 billion and has no way to pay. Last week Iran said it was halting shipments until payment was made. India said it had a backup plan and that plan is Saudi Arabia. Reportedly Saudi will give India oil at a discount to offset the quality issue between Saudi crude and Iran crude. This will boost the demand for Saudi crude and leave Iran with crude unsold. With the nuclear sanctions in place there are very few countries willing to deal with Iran so selling that unused oil could be a challenge.

It will be interesting to see how the oil market deals with the extra drain on Saudi. The oil being sold will be their heavy sour crude so they do have excess capacity of that grade.

Jim Brown

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