Oil zoned out late in the trading session on an admission from former Greek Prime Minister Lucas Papademos who dared suggest that preparations for an exit from the euro zone are being considered. This of course would be expected but to hear the architect of the first big Greek bailout agreement and noted economist admit it in public, is really something else. It had not been polite in European leadership circles to mention even the nearly unfathomable possibility of a Greek exit yet recently it seems that reality may be sinking in.

For oil that gives us a sinking feeling. Not only will the Euro initially tank on that speculation, the dollar will rally as safe haven seekers will run to the greenback for safety. Oil demand will also become suspect as fears of contagion may have a deflationary impact on price. Worries about the strength of European banks then would freeze lending perhaps, and energy demand would dry up. Or at least that is what the moves in oil is signaling and has for some time, not to mention other commodities. Can the EU find love, happiness and stability after a Greek exit! Traders are not willing to wait around and find out.

Of course oil is watching with fascination the latest agreement between the international atomic energy agency and Iran. While most believe that this last minute agreement by Iran is to put their best foot forward ahead of the talks with western powers regarding their nuclear program, it is obvious to everyone - except maybe Iran - that already this showdown has done long term damage to the energy industry. You see as it became clear to European and Asian customers of Iranian crude that they would have to replace that crude and they are finding out that Libyan and Iraqi crude oil works just as well. Iran may lose market share long term and even if the European embargo is lifted, they may have a hard time getting those customers back. Why deal with a wacko regime that is only going to give you uncertainty when you can buy oil from an up and coming democratic producer like Iraq.

In a testament to the brave fighting forces of Iraqi Freedom, it is clear that Iraq can be counted on as being a more reliable supplier of crude than the nuclear ambitious and Israel hating regime, Iran. Bloomberg News reports that Chinese, French, German, Russian, British and U.S. negotiators -- the so-called P5+1 group -- are meeting with their Iranian counterparts in Baghdad. The diplomats earlier arrived together and were transported by the U.S. to a government guest house, according to a western official who requested anonymity because of the meeting's sensitivity. While Iran, target of an investigation by the United Nations International Atomic Energy Agency since 2003, denies it is pursuing nuclear weapons, the Islamic Republic has failed to cooperate with inspectors and is under multiple international sanctions. Israel has warned that time to reach an agreement over Iran's nuclear work isn't unlimited and hasn't ruled out military strikes if diplomacy doesn't work.

At the same time the market has to come to grips with a world that is bulging with inventory. While some suggest that global supply might tighten down the road, questionable growth from China and the real possibility of more economic turmoil in Europe only makes those supplies look even larger. Bloomberg News reports that, Oil's Pillar of Strength Fades as China Slows. The first drop in Chinese fuel demand in more than three years is stoking speculation that a slowdown in the world's second-largest economy will weaken crude prices. Oil-product use in China slid 0.1 percent last month from a year ago, the first decline since February 2009, according to government data. Inventories in April rose to the highest level in seven months, a May 21 newsletter distributed by the state- run Xinhua news agency showed. The disappointing data reinforces the bearish outlook for oil, according to Morgan Stanley, which described the country as a pillar of strength for the market in the first quarter.

Stocks in Cushing, Oklahoma will more than likely hit another record in the country of the world's largest consumer. That may overcome signs of improving gasoline demand. DTN reported U.S. retail gasoline consumption rose sturdily last week as prices continued to fall, SpendingPulse reported Tuesday. The comparison to a year ago remained negative but was a small enough deficit that the next few weeks might well see current demand match or outstrip that seen in late May and early June 2011. As measured by purchases at the pump, gasoline demand increased by about 113,400 b/d, to an average of 9.090 million b/d for the week ended May 18. Demand compared to the same calendar week in 2011 was down 0.9% versus minus 3.6% in the previous report. The year-on-year comparison of demand on a four-week average basis showed the long-running shortfall narrowing to 3.9% from the minus 5.2% seen in the last report. Meanwhile, year-to-date retail gasoline demand strengthened relative to previous weeks, narrowing a year-on-year deficit to minus 5.2% from the last report's 5.4% figure.

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