LONDON (Reuters) – Oil markets have remained strangely calm despite being hit by a series of large shocks since the turn of the year.

Looking only at prices, what would a newly arrived Martian spaceman make of the market at the moment?

Escalating violence and the loss of oil output in Libya; intensifying unrest across the Middle East; and the earthquake in Japan. Each could have been expected to produce a significant price response and surge in volatility. But like Arthur Conan Doyle’s fictional dog that did not bark in the night, price and volatility changes have been notable only for their absence.

In the last few weeks oil prices have seemed comfortable range-trading in the face of heavier than normal news flow and a broad range of positive and negative shocks.

Our Martian looking only at the time series of crude prices over the last two months and not the news wires would not guess the market had been hit by conflict spreading across the oilfields of a major producer, social tension in another, and one of the largest earthquakes recorded in a consuming country.

MONETARY POLICY AND POLITICS

Oil prices have risen strongly in the last seven months, but most of the move occurred before the outbreak of unrest in North Africa and must therefore have been driven by other factors.

LONDON, March 16 (Reuters) – The deployment of Saudi troops to Bahrain has underlined the depth of the West’s strategic failure across North Africa and the Middle East.

The collapse of states backed by the United States and its Western allies represents a strategic setback akin to the loss of central and eastern Europe for the Soviet Union.

It will sharply reduce Western influence across the region, including the ability to negotiate understandings on oil prices in exchange for security guarantees and external support.

Oil will carry a bigger political risk premium going forward, requiring the market to maintain a higher level of inventories and surplus capacity for any given level of prices.

Unfortunately, political risk is not well understood; the tools for assessing it remain more rudimentary than for other risks such as market risk, credit events and natural disasters.

Market participants will need to invest significantly more effort in understanding political risks. On the supply side political analysts must become more adept in quantifying their forecasts and developing a wider range of finer-grained scenarios. Political risk analysis must be de-coupled from foreign policy to focus on objective commercial assessments rather than geostrategic advice.

In the meantime, prices will include not just a premium for political risk but also a considerable uncertainty premium reflecting the inability to assess risk in a reliable way.

LONDON (Reuters) – The devastating earthquake off Japan’s northeast coast on Friday is probably mildly bearish for oil prices and other higher-risk financial assets such as equities.

Direct financial effects from the earthquake should be relatively modest, however, unless it triggers a much wider flight from risk.

Economists are divided about whether natural disasters have positive or negative impacts on output growth and asset prices. Rebuilding in the aftermath of a disaster can provide a powerful stimulus in sectors such as construction and raw materials. It

is sometimes portrayed as equivalent to Keynesian fiscal stimulus.

In Japan’s case, automatic shutdowns at some of the country’s nuclear plants, and the declaration of a nuclear emergency to trigger relief measures, could lead to at least a temporary increase in demand for imported LNG as well as middle distillates and residual fuel oil, but no serious damage has been reported so far.

ICE gasoil prices initially rose in anticipation of increased distillate and LNG consumption by Japan’s power producers, though the market has since reversed course.

But prices for both Brent crude and U.S. light sweet oil are down and equity markets have softened, pulling down products as well, as investors conclude the earthquake will weigh on growth and lead to a broad sell off in risk assets.

LONDON (Reuters) – Policymakers and markets are struggling to get to grips with chaos in Libya and what it means for oil prices and the economy. Recent statements by officials and commentators betray confusion and incoherent thinking.

Nowhere was the confusion more evident than contrasting comments made yesterday by Richard Fisher and Dennis Lockhart — respectively the presidents of the Federal Reserve Banks of Dallas and Atlanta.

Reflecting his stance as an inflation hawk and sceptic about the merits of a second round of quantitative easing (QE2), Fisher warned he was watching carefully to see how much of the increase in oil prices will be passed through to customers. He cautioned “the liquidity tanks are full, it not brimming over.” The Fed has done all it can. Now it is up to private business to convert liquidity into investment and jobs:

“As a voting member of the FOMC this year, I have made clear within the meeting room and in public speeches that, barring some frightful development, I will vote against any program that might seek to extend or enlarge the substantial monetary accommodation we have already provided”.

In contrast, Lockhart observed the Fed would have to respond by easing monetary policy further if rising oil prices threatened to push the U.S. economy back into recession.

Lockhart argued the United States could absorb a moderate increase in oil prices over a relatively short period of time, and $120 per barrel would probably be manageable. But a further rise in prices, though not his base case, could not be ruled out, and at $150 would create more serious problems.

MOVING INFLECTION POINTS

LONDON (Reuters) – Before the latest unrest Libya’s crude oil exports amounted to 1.3 million barrels per day or just 1.5 percent of global production.

But several commentators say this understates their importance to the market because the crudes under threat are light sweet oils which are particularly valuable to refiners owing to their high yield of light products (gasoline, middle distillates) and lack of impurities (sulphur).

Libya’s Es Sahara , which loads at Zawiyah in the west of the country, contains just 0.09 percent sulphur by weight and yields 75 percent valuable light products without cracking, according to an assay published by Total Oil Trading.

Es Sider which loads in the eastern half contains 0.37 sulphur and yields 60 percent light products.

In contrast, the sulphur content of Saudi Arab Light is as high as 1.8 percent and it yields only about 53-55 percent light products without cracking. Despite its name, Arab Light is really a medium sour crude which requires more hydro-treating and cracking to remove the sulphur content and raise the yield of premium products.

Saudi Arab Heavy is even worse and contains 2.9 percent sulphur and yields less than half light products. It requires extensive additional processing. Only some refineries are equipped to handle such poor-quality crude to produce high-end products meeting fuel specifications in North America and Western Europe.

Extra Saudi production is therefore not a perfect substitute for barrels lost as a result of mounting violence in Libya.

LONDON (Reuters) – The concerted pushback has begun. Investment banks, central banks and governments fanned out on Thursday to insist soaring oil prices need not push the world economy into a recession.

While this is possible it is not likely. Simply saying something is so does not make it so, as a U.S. federal judge recently observed.

Each of these groups has a powerful interest downplaying the impact of rising energy prices on financial markets and economic activity.

PRICES NOT YET A THREAT

Financial services providers and hedge funds benefit from price volatility as a result of heightened volumes, commissions, spreads and option premiums across their proprietary trading, market-making and customer execution businesses.

Commodity arms of major banks had a disappointing year in 2010 as oil prices stayed range-bound. The return of volatility should ensure a big pick up in revenues and profits in 2011.

But volatility in commodities will only benefit bank revenues if it does not damage revenues from other product lines such as fixed income, equities and currencies, principal investments, and investment banking and advisory work.

LONDON, Feb 24 (Reuters) – Oil prices have entered unsustainable territory. Recent price surges provide strong indications of a bubble in an advanced stage. [ID:nLDE70D1DH]

Brent prices vaulting over $117 per barrel in the last 12 hours imply the need for a global slowdown or outright recession to bring consumption back in line with diminished expectations of supply, as rising turmoil in the Middle East causes the market to start pricing in serious output disruptions.

If sustained for more than a few weeks, current oil prices will push weaker economies such as the United Kingdom back into recession and cause sharp slowdowns in the United States and oil-importing emerging markets such as China. r.reuters.com/jux28r

No one actually believes a recession-induced reduction in demand is needed at this point. OPEC has over 4 million barrels per day of surplus capacity, more than 2.5 million bpd even if Libyan production was lost entirely. Commercial inventories of both crude and refined products are ample, more than enough to cover a temporary loss of output.

OECD countries hold commercial crude and product stocks amounting to 2.7 billion barrels of oil. In addition, OECD countries hold 1.5 billion barrels of government-controlled strategic stocks that could be released in an emergency, according to the International Energy Agency (IEA).

Combined commercial and strategic stocks amount to 91 days consumption. They could cover the total loss of Libyan exports for 8.9 years and the complete loss of exports from all OPEC members for almost 5 months.

China and other developing economies have been building their own reserves to insulate themselves from physical shortages or severe price movements. While the extent of non-OECD strategic stocks is not reported, total global inventories are very high, and there is no physical threat to the adequacy of global oil supplies.

LONDON (Reuters) – The global economic outlook is beginning to look grim as inflationary pressures accelerate and growth headwinds mount.

Effective oil prices (including refiners’ margins for products such as gasoline and distillate) have risen well above $100 per barrel in response to strong demand from emerging economies and escalating unrest in the Middle East.

Most forecasters employ a rule of thumb that every $10 price increase trims global growth around 0.5 percent over the next twelve months. Spot prices for both Brent and West Texas Intermediate (WTI) have risen $20 per barrel since November, which could slice 1 percent off predicted growth in 2011 if price rises are sustained.

International Energy Agency (IEA) Chief Economist Fatih Birol this week warned oil prices were in the danger zone and pose “a serious risk for the global economic recovery”. Executive Director Nobuo Tanaka was even more blunt, warning the burden on consuming countries could trigger a repeat of the crisis in 2008.

BROAD COMMODITY INFLATION

Inflationary pressure is not confined to energy. Cocoa prices have hit their highest level for 32 years, while Arabica coffee is at its highest level since 1977, and cotton has also hit multi-decade highs. Wheat and corn are back to levels recorded during the food crisis of 2008.

Industrial metals copper and tin have hit record highs in recent weeks. BHP Billiton this week forecast iron ore prices would remain high for at least the next two years.

LONDON (Reuters) – Fierce conflict has broken out among traders over Brent prices and the spread with U.S. light sweet crude.

U.S. crude futures for March and April delivery surged higher yesterday, while Brent prices were held down until after the ICE Brent settlement, erasing much of the previous weakness compared with the European benchmark.

Brent’s premium over NYMEX light sweet crude oil, known as West Texas Intermediate (WTI), tumbled to just $9.97 per barrel immediately prior to the settlement, from $16.51 on Feb. 18, shattering the previous uptrend (Chart 1).

Spreads exhibited exceptional intra-day volatility. Opening at $12.70, the spread traded lower through the day to reach a low just before Brent settled at 19:27-19:30

GMT, soaring once the settlement was over to finish the day little changed at $12.55. The market gapped lower to open at $10.92 today (Chart 2).

From the price action, someone seems to have lent on Brent prices until the settlement was safely completed, then allowed the market to catch up with WTI.

The ferocious battle over Brent and the spread suggests at least one big market participant has been caught out by soaring prices as a result of escalating violence in the Middle East, as well as the narrowing arbitrage with U.S. markets as oil flows shift to Europe and Asia, and is trying to limit the damage.

LONDON (Reuters) – Escalating food and fuel prices are a sign the global economy is approaching full resource utilisation and the limits of sustainable output.

Policymakers, commentators and investors are still fiercely debating whether high unemployment and idle factories in the United States and Europe are caused by cyclical lack of demand (in which case Keynesian demand management is the appropriate remedy) or reflect structural shifts (making Keynesian responses irrelevant).

But a quick look at the global picture makes it clear that the problem is structural (distribution of demand) rather than cyclical (lack of demand at a worldwide level).

CPB INDUSTRIAL INDEX

The attached chart shows output growth in the advanced economies and emerging markets since 1991, based on data compiled by the Netherlands Bureau for Economic Policy Analysis (CPB), one of the most respected trackers of global output and trade flows (here).

CPB assigns a weight of 35 percent to the industrial output of emerging markets, based on their output in 2000. But following the banking crisis in the advanced economies and continued strong growth in developing ones, emerging markets now probably account for almost half global output.

Emerging markets will consume almost as much oil in 2011 (43.2 million barrels per day) as OECD economies (45.9 million barrels), according to the International Energy Agency, confirming that emerging markets now account for half the global economy.