Sunday, April 22, 2012

Phil Flynn: Precautionary Demand

Crude oil prices were rising early Friday and there is better than expected data from Germany and Microsoft, yet in the big picture, there are those that are saying that oil prices have risen in recent months not due to speculation but what we should call “precautionary demand”. According to Dow Jones U.S. sanctions against Iran are hurting growth in that country and creating "precautionary demand" for oil, which is part of the reason oil prices remain at current high levels according to Caroline Freund, the World Bank's chief economist for the Middle East and North Africa.

In other words, countries have been hoarding oil in the event that oil supply might get cut. This has increased demand and prices have gone higher. It is a valid fundamental reason for oil prices to rise and has been a major factor in the pricing oil. The rise is not due to speculators, as the uninformed would have you believe, but the physical buying of extra barrels. As the Iran risk seems to be pushed back that buying has eased a bit.

Dow Jones reported overnight that European Union member states have agreed to postpone by one month the deadline for a review of the oil embargo on Iran. The EU agreed in January to implement a full oil embargo on Iranian crude oil exports by July 1 in response to its nuclear program. But as a concession, to Greece in particular, it agreed to hold by May 1 a review of the effect of a full embargo. That left next Monday's Foreign Affairs Ministers Summit as the last opportunity to agree any change to the embargo.....Read the entire article.

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