A SEPARATE PEACE
Fighting between Iraq government forces and Shiite rebels have eased for now. While the fighting has calmed down for now, the escalation in tensions between government and rebel forces in Iraq's southern oil region leaves the situation a geopolitical risk factor that may come back to support oil prices if oil supplies are threatened again. Under British control until late last year, the Basra area was a steady source of oil even from the first days of Iraq War II – approximately 1.5-1.7MM/bpd. A real disruption of this output would be the catalyst for crude oil prices to soar. Participants should avoid complacency, the current lull in fighting is fragile and a resumption of hostilities could to lift prices back to and possibly beyond last week's highs. The dollar has moved a bit higher on news Euro zone inflation hit a new high in March. If the dollar continues to lose ground this session on the tightening rate outlook for Europe, it could help firm crude oil prices, as well. Hopes of a dollar rebound, against the Euro in particular, were dashed by Trichet’s comments this week that an ECB rate cut is not coming anytime soon. Expectations are that the dollar will probably be pushed back to below the March lows since it is assumed that Federal Reserve will cut interest rates further. Last week's bullish inventory report showing large drops in product stocks has made the market much more sensitive to supply issues. If oil workers in Nigeria and Norway decide to go on strike this week, it could be the catalyst that lifts May crude oil back toward the highs. Even though the sell off from all time highs has helped to technically balance the market, the fundamentals in terms of supply and demand do not support current levels, and they have not for sometime. Crude oil demand is at its lowest levels since hurricane Katrina based on refinery utilization rates. Even so, the market still retains the ability, in the short term anyway. to overcome recent highs.
M. Fitzpatrick
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