Energy prices are experiencing a major pullback today on a one-two punch of news on the geopolitical front and of fundamental import.
Crude oil, in particular, has broken most of the major moving averages that I monitor, and the current low of the session – $132.00 – represents a 10% retracement or pullback from the high set last Friday at $147.27. Before consumers get overly exuberant, however, crude oil prices need to really break $131.00, before the massive losses seen in natural gas and corn can be realized here.
The first part of the referenced one-two punch involves the potential for a significant de-escalation of the international tensions over Iran’s nuclear program. News broke late last night that United States Undersecretary of State William Burns will be in attendance at a meeting in Geneva over the weekend that will also include Iran’s top nuclear negotiator, Saleed Jalili. No matter how it is spun, otherwise, it represents a major policy shift for the US, and will be the first high level direct talks, since 1979.
As I have been saying, much of the recent sizzle in the race toward almost daily record price levels is attributable to the tensions over Iran, and the recent tangible statements and actions by Israel, Iran, and the US, in terms of military exercises. While the reality of a unilateral strike by Israel is remote, the energy market, of late, was not about to be confused by the facts.
It’s worth noting that Secretary Burns, in particular, is favorable toward engagement, and he has previously cited the approaches taken toward Libya and North Korea as “properly practiced” engagement. Forward progress on the Iran situation was precisely Israel’s end-game, in my view, and their strategy appears to be seeing some early success. Of course, anything still could happen, but the reality of a “line of fire” from Syria to Tehran seems to have renewed enthusiasm for further discussions, at the very least.
The weekly inventory reports are the other motivator today. There were larger than expected gains reported, across-the-board, which have furthered the bearish sentiment that emerged, yesterday. Again, I must caution readers that moves centered on the weekly inventory data can prove fleeting; however, demand declines in gasoline, jet fuel, and diesel-type fuels made the report unassailably bearish.
The backdrop of testimony of Federal Reserve Chairman of Ben Bernanke and Treasury Secretary Paulson is also a factor. The plans to bailout the mortgage industry and the impact on the US balance sheet has implications for the dollar. The extent of the proposals had the potential to blow a hole in the side of the dollar’s value, but, so far, the greenback has hung in there. In fact, at this writing, the dollar is in positive territory on the day against the euro, pound, and yen.
While we need more time at these lower levels to have a sense that the back of crude oil and gasoline prices have been broken, consumers can take some solace from the breakdown in the prices of natural gas and corn that more generalized commodity selling will ensue. Again, the critical breaking point for crude oil will be the $131 level. It’s the level to watch.
John P. Kilduff Senior Vice President Of Energy at MF Global Ltd. He's also a CNBC contributor.