It's no surprise that the normal supply and demand economics in the oil markets have been replaced with fear and speculation. And today, two major players went on the offensive.
Algeria’s Oil Minister and the CEO of the world’s biggest oil company by market value, ExxonMobil both appeared on CNBC with the same message: There is no physical shortage of oil in the markets today.
But as the price of crude slipped throughout the day, traders brushed off that commentary as old news. Traders are more focused on what happens next in the Middle East, especially with regard to Saudi Arabia and the "Day of Rage" protests called for Friday, March 11.
Youcef Yousfi, Algeria's minister of energy and mines told CNBC that there is no supply panic, no shortage of oil and that part of the rise in oil prices is due to speculation. While trying to allay fears about Saudi Arabia, he said that the country is a "stable producer and exporter." The minister also indicated that the market could handle supply disruptions saying that spare capacity is about five to six million barrels of oil per day.
Exxon’s Rex Tillerson delivered the same big picture message saying that right now, the markets are well supplied with oil and that he has not heard of any shortages. He also confirmed what the Algerian minister said about spare capacity in the market putting the number at four to six million barrels per day. Not surprisingly, Tillerson does not favor higher taxes on gasoline.
But, traders were not impressed saying the so-called risk premium remains until there is more clarity in the Middle East.
“The most significant thing I heard is from Exxon that they have no problem getting oil to replace the Libyan oil,” says Jeff Rubin, Birinyi Associates Director of Research. High prices, he says have nothing to do with a supply shortage. “Speculation is at record highs…this is not the 1970’s.”
And Chris Motroni, Heritage Energy says the market already knew we were well supplied with oil. What he sees is a market meeting resistance at $106 a barrel, but with strong demand below the market especially, in options. “Every dip there is more call buying on the upside”, he says especially for $140, $150 and $160 calls across the calendar. The "oil trade” he says, “doesn’t unwind until there is calm in the Middle East.”
But speculators beware. Abdullah Karatash, Head of U.S. Fixed Income Credit Trading at Natixis notes, "we could see some serious profit-taking in oil if Saudi Arabia’s much touted “day of rage” turns out to be little more than a whimper."