ALERT: MARKETS PLUNGE ON GROWING FEARS OF NUCLEAR CONTAMINATION IN JAPAN
 

PETROLEUM MARKETS

It is a tale of two school's of thought: The divide to contemplate falls squarely between the element that holds that a fair share of the world's energy demand growth has been negated by the quake in Japan and those  who see the aggressiveness of Sunni forces in the oil producing regions as a message to restive Shiites, (read that as Iran).
 
The fallout from the former's events are plain to see across most global markets already this morning. The DJIA and S&P 500 are falling dramatically, and in Asia, the fall is accelerating with Japan's Nikkei 225 Stock Average down more than 10%. The MSCI Asia Pacific Index slipped most than -4%. This is the panic phase when everyone looks at worst possible case scenarios. Not that a worst case couldn't happen. With radioactive material now being detected in Tokyo, worst cases are no less than nightmarish. Following this will be a cooler assessment of the actual damage and then a rebuilding stage. The experience of Kobe '95 shows that economic activity rebounds sharply then. The increase in imports will add to global inflation for these goods and may lead to an early rise in interest rates in the West.
 
Yesterday about  2000 troops of the Gulf Cooperation Council, a six-nation regional coalition of Sunni rulers, were requested and sent into Bahrain to quell a sustained challenge to its leadership by a popular Shiite revolt. Some analysts think this may actually spur a similar reaction form Iran whose influence in the region has been growing much to the anxiety of the Saudi leadership, with Bahrain right at their back door. In fact, concerns are growing that Iran may issue tacit support for the Shiite protestors in Bahrain. If these two holders of some of the world's largest reserves move towards conflict the fear of lost production has the potential to drive crude oil prices much higher.
 
For the immediate future look for refined products, especially distillates, to begin to move towards Japan as a consequence of the damage to their refinery infrastructure. Some Japanese electricity generators also have the ability to burn certain grades of crude without any refining.
 
Calls for a no-fly zone in Libya, in particular now, will have to be deftly handled as the administration tries to diplomatically maintain access to oil without tipping the precarious recovery over into a double dip recession against the rights of protestors.
 
It may be that the panic phase of the quake is passing and the assessment period is underway. Similarly, with martial activity right in the heart of the oil producing regions and involving some of the biggest actors, look for the sell off to be a bit overdone at this point. Easy acquisition of length near these levels may prove to be a rewarding idea.
 
 
TECH TALK

Crude oil's pull back from 106.95 is still in progress and a further decline towards 88.00, where all of this began, might be possible. Prices moved below the 10-day moving average on Friday's settlement and extinguished an active buy signal, and dramatically shows the fornt of the market's weakness. Gap support should hold but if it does not prices could challenge 90.00 very quickly. For the moment though, technicals take a back seat to the headlines.
 

NATURAL GAS

Gas prices continued to hold to the upper reaches of the recent trading range on speculation Japan will buy more liquefied natural gas (LNG) with 11 nuclear reactors now idled and 1.3 MM people without power. In searching for an alternative it will invariably drive up prices as it competes with other importer nations for spot supplies. Japan accounted for about 35% of global trade in 2009 and is the world's largest user of LNG. The same structural imbalances still exist though and  seasonality for natural gas demand wanes with the onset of the shoulder months between the heating and cooling season. Indicative is the NWS 6-10 day report that has called for above-normal temperatures for a little more than the eastern half of the nation. Temperatures in key gas-consuming cities New York and Chicago were seen mostly above normal for the next six days, with lows lows falling only climbing into the 40s in both cities. EIA should register the falling nearby demand on Thursday when it reports that only 38 bcf was pulled from stocks for the latest reporting period. Start paring shorts on every drop towards 3.80.

 

source: KilduffReport.Com