The collapse of talks between Iran and the “Big 6″ (the five permanent members of the UN Security Council plus Germany) should have accelerated international crude oil prices.
And yes, they are higher.
But the real spike hasn’t hit. Not yet.
The rising crisis atmosphere in the region and the genuine possibility that a fourth round of talks between the two sides will not even take place should have renewed the upward movement.
That hasn’t taken place yet, either.
Oil prices are caught between the normal dynamics of geopolitical concerns – which push prices north – and continuing concerns over a global economic slowdown – which results in lowering expectations.
Now, this limbo is a delicate balance; it could change in a matter of hours.
We are likely to see a short-term rise this evening if the Norwegian oil and gas sector strike is not averted. Labor negotiations between Norway’s oil workers and employers over pay and pensions failed – yet again – yesterday. The country is now just hours away from the first complete shutdown of its oil industry in decades. (Already, the strike has cut oil output by 13%, according to Reuters.)
Then there are the figures coming out from the Energy Information Administration (EIA) on Wednesday, which will almost certainly show a drawdown on U.S. inventories. Normally, that would also push up prices.
However, absent an Iranian move against the Strait of Hormuz or a major refinery accident somewhere in the world, the rise will be less than usual.
That’s because right now, four things are tempering the oil price rise:
- Market worries over continuing Chinese expansion;
- Spanish bond interest rates in excess of 7% (again);
- Sluggish job growth in the U.S.; and,
- Expectations of lower earnings reports.
I told Fox Business on Friday that the range for crude prices short-term should be $92-$95 a barrel in New York and upwards of $110 a barrel in London. Without the offset caused by the economic angst, each price ought to be at least $25 per barrel higher.
Last week, I noted that using employment as a forward indicator of expected oil prices is looking at the problem in the wrong way. Job growth is the most lagging indicator factor there is. It does not telegraph a change; it registers it (in either direction) well after the fact.
Overall economic performance is widely used as a more proximate gauge. Nonetheless, whether it is Chinese production, American inflation, or European performance, the projections are nowhere close to the levels doomsayers are disseminating.
But pushing the negative side does allow short artists to get additional return while not actually playing off the market underpinnings at all.
I recently gave a briefing to several international asset fund managers. During our conversation, I suggested that the near-term short cycles had pared between 10% and 12% of the actual market price of crude oil. The figures I crunched kept telling me the market really justified a contraction of between 9% and 12% in oil prices from early May through late June.
What we actually received was a cut closer to 22%.
Now granted, giving such a briefing to that crew was like lecturing the fox about raids on the hen house. Most people in that audience were orchestrating the precise artificial pressure about which I was speaking.
Still, the quickest way to end that practice is to have a couple of major daily spikes in price to force them to cover shorts and unravel positions. Yet, until the perception of market direction changes, they are able to restructure a short movement in a couple of sessions and start the whole (artificial) cycle all over again.
What is it going to take to break the hold manipulation has placed on the oil market?
There is an End in Sight
We do not need a major calamity (military invasion, natural disaster, or international threats) for this to happen, although any development in that quarter would certainly raise prices.
Rather, the market needs to be persuaded that a structure is developing to restrain the economic outliers.
The rise in oil prices does not require new problems to develop.
It merely needs the usual to return.
And for that to occur, the market needs persuasion that the concerns are in check. Some of that may begin today in Brussels, with the first meeting of EU finance ministers after the breakthrough accord orchestrated by heads of state on June 29.
Normally, finance minister sessions are dull as dishwater (believe me, I’ve sat through many). This time, however, there is some urgency. An initial sketch of the new European stabilization approach is supposed to be released today.
Of course, both the EU and the European Central Bank recognize that a detailed plan will require more than a week or so to pull together. What the markets on both sides of the Atlantic need right now is reassurance that the mechanism is coming.
This is a first step.
There are other assurances that need to emerge as well – from Chinese Central Bank policies to prospects that that next extension of the debt ceiling in Washington will not devolve into another three-ring ideological circus.
But the bottom line is firm. The underlying forces in the oil market are not going anywhere.