Morning Market Overview

There is a bit of retracement seen in the market this morning after a strong upside move yesterday.

As we have been warning for the last few months geopolitical risk is bubbling up in the oil pits. The current evolving conflicts in the Middle East sent the spot WTI crude oil contract to the highest level in around three years Wednesday as market participants are starting to view the action in Syria and Yemen/Saudi Arabia as having the potential to impact oil supply from the region. Geopolitical risk is not new in the Middle East but what is new is global oil supply and demand are quickly approaching a balanced position after spending several years in an excessively high inventory mode. With global inventories in a destocking pattern and moving very close to the so-called “normal level” or five-year average, any new disruptions in oil supply could result in spot outages in key consuming regions of the world.

We are not saying that a supply event is imminent but suggesting that market participants are starting to add a geopolitical risk premium back into the price of oil once again. The weekly EIA oil inventory data detailed this afternoon was bearish as total combined stocks of crude oil and refined products increased setting a bearish overtone with the externals mixed on the day (US equities lower/bearish for oil and US dollar lower/bullish for oil). Absent any geopolitical risk concern oil prices most likely would have traded on the defensive yesterday following the direction of equities which has been the pattern over the last several weeks.

Rather prices ended the session modestly higher (but off the intraday highs) with traders ignoring the bearish fundamentals and equities and focusing on the geopolitical risk. On the financial front, global equity markets were mostly lower on Wednesday. The EMI Index though was able to end the day in positive territory.

The EMI Index gained 0.2 percent on the day with the year to date gain is at 2.8 percent. Two of the ten bourses in the Index are still in positive territory for 2018 with London holding the worst performing spot in the Index with Brazil in the top spot with an 11.6 percent gain for the year. The positive value direction in global equity markets today was a positive price driver for the oil complex. On the currency front, the US dollar Index traded lower for the day with the Yen/USD and the Euro/USD higher. Overall the currency markets were a positive price driver for the oil complex.