Crude Oil climbs on Iran sanction, as Geopolitical tension rises

Financial markets rallied strong after Mondays sell-off.

Stocks steadied in Asian session with Korean shares rebounding as investors believed the decline after Kim Jong-il's death was excessive.

In the commodity sector, Crude Oil rose as geopolitical tensions gave commodities a boost. The market is worried about the economic sanction in Iran as a penalty of the Islamic regime's nuclear program.

It is reported that Japan will suffer the most if shipments of Iranian Crude Oil are prohibited. The 3rd largest economy in the World will not likely join its ally, the US, in sanctioning Iran.

The US Congress has passed a legislation to heighten sanction on Iran, forbidding foreign companies to buy Iran's Crude Oil through the central bank.

According to the DOE/EIA, Iran exported approximately 2.2-M BPD last year. The Country's net Crude Oil export revenues amounted to approximately US$73-B and Crude Oil exports provide 50% of Iran's government revenues. The US worries that Iran would use the money earned from Crude Oil exports for investment in its nuclear program.

Most of Iran's Crude Oil is exported to Asian countries including China, Japan, India and South Korea. China was the biggest importer of Iran's Crude Oil, buying 20% of the country's export.

The close relationship between the countries may be affected in Y 2012, although not due to the sanction. It's reported that China's Sinopec has cut its purchase by about -285-K BPD in January, buying less than 50% of the 550-K BPD agreed this year, due to payment disputes.

Japan, buying 16% of Iran's export in Y 2010, worried that the sanction may affect its source of Crude Oil. A shortage of supply may also affect the progress of Japan's reconstruction work after the earthquake in March 2011.

On the macro front, the RBA minutes for the December meeting indicated that the rate cut in the month was mainly driven by the dire situation in the EuroZone, in November, the rate cut was due to weaker-than-expected inflation.

Domestic economic situation has softened but it has not weakened to an extent that a reduction in interest rate was needed. Indeed, policymakers continued to believe that growth would be close to trend in coming few years.

The central bank did not give any hint of monetary policy outlook. But, given the highly uncertain Global economic outlook, especially in the EuroZone, and the moderation in inflation, further easing is likely to be seen in as soon as early Y 2012.

Paul A. Ebeling, Jnr.

Paul A. Ebeling, Jnr

Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster's Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world.

Paul A. Ebeling, Jnr has studied the global financial and stock markets since 1984, following a successful business career that included investment banking, and market and business analysis. He is a specialist in equities/commodities, and an accomplished chart reader who advises technicians with regard to Major Indices Resistance/Support Levels.