Oil prices recover for a second day as the situation in Libya and potential contagions of the tensions to other countries remained worrisome to many investors. Policymakers around the world addressed the issue about rising inflationary pressure as recent rally oil prices have driven concerns that global economic growth will be tempered. The front-month contract for WTI crude oil approaches 100 again while the Brent contract trades around 114. Gold and silver remain firm as geopolitical tensions spur demand for safe-haven assets. Heightened inflationary pressures also benefit gold if central banks fail to adopt appropriate measures.
While opposition leaders in Libya were reported to have begun planning a provisional government, , US Secretary of State Hillary Clinton said for the first time that the country has been 'reaching out to many different Libyans who are attempting to organize in the east and, as the revolution moves westward, there as well'. In any case, the regime of Muammar Qaddafi is coming to an end. In Bahrain, the government has not started a conversation with opposition leaders. The General Federation for Trade Unions said that, even though the King appointed 5 new Cabinet ministers, they do not reflect the people's 'ambitions and popular voice'. The union requested to form a transitional government that will meet the 'demands of the people' and bring about 'real political change'. In previous articles, we discussed about the impacts of unrest in Bahrain on Saudi.
Contagious risks are not only in the Arabic world. North Korea outraged and threatened to fire its Southern neighbor as South Korea has dropped leaflets within the border, describing recent revolutions and protests in the MENA region and hoping to incite similar action there. In China, hundreds of police were deployed in Beijing and Shanghai at the site of demonstrations. Meanwhile, China's Premier Wen Jiabao pledged to narrow the wealth gap and penalize officials who abuse power.
In the 3 central bank meetings this week, we expect policymakers will talk about the potential impacts of recent oil rallies on growth. ECB Vice President Vitor Constancio said the central bank's challenge is 'to go back to normal implementation of monetary policy...increase in reserves or in the monetary base is not per se inflationary'. Indeed, Fed officials, while the next FOMC meeting will not be held until 2 weeks later, expressed their opinions on the inflation outlook. Richmon Fed President Jeffrey Lacker said that rising oil and commodities prices pose a risk to inflation later in the year. Moreover, the central bank may need to unwind QE2 as 'the improvement in the growth outlook has been noticeable enough'. Vice Chairman Janet Yellen pledged to prevent any surge in oil-led inflation.
Commitments of Traders:
With the exception of crude oil futures, traders were bearish on the energy complex in the week ended February 22. Unrest in the Middle East and North Africa drove worries about disruption in oil output, leading to rallies in oil prices and a surge in net long positions in crude oil futures. Net length for crude oil futures jumped +53 508 to 219 022 contracts during the week. Dropping for a third consecutive week, net length for heating oil futures andgasoline futures plunged -4 488 to 31 445 contracts and -1 667 to 62 069 contracts, respectively. Warmer-than-expected weather trimmed gas demand, resulting in further addition of net short in natural gas futures during the week.
The precious metal complex had mixed performance. Net length for gold futures rose 7 580 to 180 424 contracts but that for silver futures fell -1 714 to 39 223 contracts. For PGMs, net length for platinum futures dipped -495 to 28 389 contracts while that for palladium climbed +273 to 15 493 contracts.