Month: August 2013

Is rupee ‘out of control’?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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As the battered down rupee slumped to yet another lifetime low of 64.54 to the dollar on Wednesday, analysts say the selling is getting out of hand and the currency could fall to 70 in the coming months.

Foreign investors have yanked money out of India in recent months amid fears over the winding down of US monetary stimulus and deteriorating economic conditions in the country.

The rupee has been one of the world’s worst performing currencies this year as a result, slumping 15 percent since late May when the Fed tapering fallout first took hold.

Keagan York, head of currency strategy at Sydney’s Compass Global Markets, said the rupee was going into free fall.

“I wouldn’t touch it right now,” said York. “If you are an importer looking to buy Indian goods, I’d wait, as they are just going to get cheaper and cheaper.”

Many analysts are now calling for levels as low as 70 to the dollar over the next few months, a decline of over 9 percent from current levels.
Lasanka Perera, managing director at Global FX Partners, said the rupee is now “out of control.”

“We’ve got high inflation, continual downgrades in growth and the Reserve Bank of India (RBI) has failed to create stability and confidence around that currency. As long as there is no change I think 70 (to the dollar) is well within reach,” he said.

India has been gripped by a mood of crisis in recent weeks, despite Prime Minister Manmohan Singh’s reassurances on Saturday that India was not headed for a 1991-style balance of payments crisis.

A key part of the problem seems to be that investors have lost confidence in India’s central bank, after it made a number of confusing moves dubbed by many as policy “flip-flops.”

Late on Tuesday, the RBI announced plans to inject 80 billion rupees (USD 1.3 billion) into the country’s banking system by buying long term government bonds amongst other steps, which industry watchers say contradicts its recent tightening moves including the imposition of capital controls last week to prop up the rupee.

“The RBI policy moves are sending mixed signals. They cannot control both yields and FX. They are trying to control too much and are losing credibility,” said Nizim Idris, head of strategy, fixed income and strategies at Macquarie Bank, who has revised his forecast for dollar-rupee to 70 by year-end, versus a previous forecast of 64-65.

Idris said the RBI’s latest move to buy bonds in a bid to reduce government debt yields, which have hit 9.48 percent, could have a reverse effect.

“To attract capital back into India, investors need to see value and value should come from wider real bond rates through higher yields. By buying bonds they are actually reducing the bond market’s value, and subsidizing foreigners who are exiting the market,” he noted.

Compass’ York said he did not see the rupee moving quite as low as 70 to the dollar, but is sticking to his forecast of 68 by the end of the year. He said a silver lining is that the weaker rupee should provide a boost to Indian exporters.

“I expect it (the rupee) will see a bit of resistance at that level (68 to the dollar) as India should see a pick-up in manufacturing,” he said.

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Are emerging markets facing an abyss?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The prognosis for emerging markets is not looking good after four straight days of heavy selling in stocks and sharp currency falls that have prompted Turkey and India to step in with supportive steps.

While the volatility, driven by concerns about an unwinding of US monetary stimulus, may not be over yet, nor is it time to hit the emerging-markets panic-button, strategists say.

Indeed, markets were slightly calmer on Wednesday with the MSCI emerging markets index down just 0.1 percent and off six-week lows hit the previous day.

The Indian rupee was at 63.31 per dollar, about 1.25 percent above Tuesday`s record low, while the Indonesian rupiah pulled back a touch from a four-year trough against the dollar and the Brazilian real held above more than four-year lows hit on Monday.

“Emerging market currencies will sell off further, especially ones that have compromised balance of payments,” said Stuart Oakley, managing director for Asian currency trading at Nomura.

“But don`t expect these currencies to fall into an abyss, simply because there`s still so much money and assets under management among some of the big to medium-sized long-term pension funds, and their allocation to emerging markets is still quite small.”

According to money manager BlackRock , emerging markets account for roughly 51 percent of the world`s gross domestic product (GDP), but market capitalization represented by emerging markets is just over 10 percent, suggesting the fall-out from the market rout could be limited.

“I don`t think the sell-off has become disorderly in the way that it was during [the] 1997-1998 [Asian financial crisis],” Nizam Idris, head of fixed income and currency strategy at Macquarie Bank in Singapore told CNBC Asia`s “ Squawk Box ” on Wednesday.

“I think liquidity is still there. The price action is for a higher dollar (New York Board of Trade (Futures): =USD) versus emerging market currencies, but we are still not in crisis mode or panic mode,” he added.

Emerging markets, which benefited from massive US monetary stimulus in the wake of the global financial crisis, have come under heavy selling pressure since May as investors started to anticipate a scaling back of the Federal Reserve`s asset purchase program.

Countries which run big current account deficits such as India and Indonesia in particular have borne the brunt of the selling. India`s stock market, for instance, is down about 10 percent since May.

Still, strategists say there is growing attention on the opportunities to be made from knocked-down emerging market assets.

“We need to get a grip a little bit,” Bill Maldonado, HSBC global asset management CIO for Asia-Pacific, said on CNBC, talking about the rout in emerging markets.

“The volatility is gut-wrenching at times and it`s very difficult to stomach that, so naturally there is some caution. But there`s very much an anticipation of saying, there`s some fantastic opportunities here, too,” he added.

– By CNBC.com`s Dhara Ranasinghe; follow her on Twitter @DharaCNBC

Copyright 2011 cnbc.com

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Fed’s hawkish message a lever for rates

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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With the Fed on a path to taper, rising bond yields could act as a razor’s edge against the stock market, cutting into gains with every tick higher.

The minutes of the last Fed meeting show that the Fed on Aug 1 was getting set to reduce, or taper, its bond buying by the end of the year, but with no clear signal of when it might move.

The minutes, released at 2 pm ET Wednesday, triggered immediate selling in both bonds and stocks. The Dow swung to a triple digit loss, which it then totally reversed in a short-covering charged rally, before tumbling again to end with a 105 point loss at 14,897.

The volatility is expected to continue.

“I thought to be honest, (the minutes) were somewhat of a non-event,” said Peter Boockvar, chief market analyst with the Lindsey Group. “I think while they didn’t specifically mention anything about September, by not pulling back from the possibility of September, people are concluding it is September. But going through this I don’t see anything new.”

The Fed has made it clear its pull back from the USD 85 billion in bond purchases would be dependent on the economy.

“It’s a done deal. They’re going to taper, unless things go south,” said Barry Knapp, head of equity portfolio strategy at Barclays. “This leaned more hawkish.”

Knapp said one hawkish note in the minutes was that the Fed committee members rejected the idea of lowering the 6.5 percent unemployment rate threshold it set for raising the Fed funds rate. Even though the Fed did not move up expectations for a short-term rate hike before 2015, Fed funds futures, in afternoon trading, reflected a higher market expectation of a rate hike in late 2014, he said.

Treasury yields meanwhile edged higher into the late afternoon with the 10-year at 2.89 percent, and by early evening, it was testing the 2.9 percent high it put in earlier in the week. Yields rose along the curve, with the 5-year yield moving rapidly higher to 1.64 percent. The belly of the curve is important for rates tied to business loans.

Coming up: Jobless claims

Markets now turn their attention to economic data, particularly weekly jobless claims, released at 8:30 a.m. Thursday. The claims data will be especially important since it is from the same week that the survey is taken for the government’s August employment report, to be released Sept. 6.

“If they stay in the 320,000 area, that really implies a stronger jobs number for this month,” said Knapp. Claims are an important indicator for employment, a key metric in the Fed’s calculus for easing.

“I think claims are a big deal. They really moved the market in the last few weeks,” Knapp said. The jobless claims last week fell to 320,000, the lowest level in six years, and triggered a move higher in bond yields, which in turn helped drive a stock market selloff.

Other data Thursday includes manufacturing PMI at 8:58 p.m., FHFA home prices at 9 a.m. and leading indicators at 10 am. There is also PMI data expected for China and the euro zone.

The Fed minutes did strike one dovish note when they mentioned that a number of participants were somewhat less confident than they were in June about economic growth picking up in the near-term.

RBS senior Treasury strategist John Briggs said the market expected to hear an overall dovish message. “On the market, I think we probably came in on balance…with most people thinking given the rate rise, the tone of this thing was going to be dovish. I’m not saying they’re hawkish . I just don’t think they’re saying anything new,” he said.

“The minutes basically say ‘remember what Bernanke said at the July press conference – that’s still our message.’ The tapering time line is the same,” he said. The Fed has said it expected to begin tapering before the end of the year.

The minutes also landed a day ahead of the annual Fed symposium in Jackson Hole, Wyo. Fed Chairman Ben Bernanke breaks with tradition this year and will not attend, but the symposium, starting Thursday evening, will certainly be filled with speculation about who will replace him in January.

“Jackson Hole could be interesting,” said Knapp. “I think Jackson Hole is going to be a vigorous debate about the efficacy of asset purchases and the Fed will generally defend the impact on the US  economy,but there could be some very interesting work on the impact of emerging economies and foreign markets.”

Emerging markets have come under serious pressure, as US  rates rise and the Fed looks set to pull back from easing.

Briggs said he expects Treasury yields to continue to move higher and the bond market is trading anxiously. “I just think the market’s vulnerable. It trades like it’s vulnerable. We had emerging market woes, and it caused a one-day pop in the market. Now you’ve got stocks off late, causing no bounce. It tells you the market is long and vulnerable. I fear that the technical hedging that might need to occur if we continue to head north, especially if we go above 3 percent,” he said, adding the 30-year is also aiming at the key 4 percent level.

“If we go above 3 percent, I think at that point, it might be an eye opener for the equity market. I think that would have a psychological impact on risk assets,” he said. The selloff in stocks actually may curb some of the move higher in rates, he added.

Knapp said he expects rising rates to pressure stocks, and he expects the market to fall until the Fed starts tapering, which he expects in September. “The market’s going down between now and then,” he said. “By the beginning of October, we should likely be below 1600 (on the S&P).” The Fed meets Sept. 17 and 18.

Earnings before the bell are expected from Sears, Dollar Tree, Game Stop,Abercrombie and Fitch, and The Buckle. Gap, Marvell, Ross Stores, Pandora, andAeropostale report after the bell.

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Is India moving closer to a ratings downgrade?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The plunging rupee has intensified concerns over India’s dreary economy and raised the question whether Asia’s third largest sovereign credit rating may be downgraded to “junk” status in the coming months.

Ratings agency Standard and Poor’s (S&P), which cut its outlook on the country’s BBB- rating to negative last year, told CNBC it continues to see a one-in-three chance of a downgrade in the next 1-2 years.

However, if weak sentiment causes business financing conditions and investment growth to deteriorate further – putting the country’s longer-term growth prospects at risk – the likelihood of a downgrade will increase, S&P said.

“India’s long term growth prospects could weaken on a sustained basis, with negative implications for the sovereign credit fundamentals,” Kim Eng Tan, senior director, Asia-Pacific Sovereign Ratings, S&P told CNBC this week.

A downgrade to junk status would result in higher overseas borrowing costs for Indian corporates and hurt the country’s ability to attract foreign investment.

“It is, however, too early now to tell if this scenario will come to pass. This will be largely dependent on policymakers’ reactions to these latest developments,” Tan said.

India’s economy has experienced a deepening slowdown over the recent quarters, expanding just 4.8 percent in the January-March period. Growth is expected to remain under pressure in the coming months given tighter liquidity conditions and weakening capital investment and consumption.

On top of a deceleration in growth, the economy faces a rapidly decelerating currency, which hit a record low of 64.13 against the U.S. dollar on Tuesday. The falling rupee is negative for India’s economy because it stokes inflation and raises the country’s import bill, putting further pressure on the current account position deficit.

So far, the government’s response to bolster the weakening rupee through tightening liquidity and restricting capital outflows have failed to instill confidence in investors, who view the measures as a mere short-term fix.

“We view the capital outflows and depreciating rupee as an indication of weakening investor confidence in India. Measures introduced by the government to restrict capital outflows have also increased uncertainties among investors both foreign and domestic,” said Tan.

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For Indians abroad, rupee’s plunge is great news

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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While the free-fall in the rupee threatens to worsen India`s economic fundamentals by widening the trade deficit and stoking inflation, the country`s citizens living overseas aren`t sweating it.

The weak rupee is also helping those looking to book hotels in India. Srinivas Patnaik, who is based in the London office of Siddharth Travels, an Indian travel company, told CNBC that a lot of people were trying to pre-pay or upgrade to take advantage of the weaker currency right now.

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Is ‘chaos’ ahead? Some truths about Fed policy

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Investors focusing on the tapering question probably are missing the bigger picture about Federal Reserve policy and how it will continue to shape financial markets.

The central bank itself has been insistent recently that the USD 85 billion a month in bond purchases surrounding the tapering question are the less relevant of the two main prongs—the other being the near-zero funds rate – of the historically easy monetary policy since the financial crisis.

Still, investors continue to focus on Long-Scale Asset Purchases – known formally as quantitative easing and less so as money-printing – while not paying enough attention to the more important question of forward guidance and how that affects the interest rate picture.

“This taper thing is a ruse,” said Kevin Ferry, president of Cronus Futures Management in Chicago and author of the Contrarian Corner blog. “If you really put the question to (investors of what tapering means), they don’t have the answers.”

Aside from mild relief rallies the likes of which came Tuesday, markets have been wobbly since essentially mid-June when Fed Chairman Ben Bernanke provided the first vivid clues about when the Fed would begin to pull back on the third leg of QE.

But what the market is getting wrong is the impact such a pullback might have.

Even if the Fed does begin tapering, it will do so only in a gradual manner of maybe USD 10 billion a month—”like missing one day of (Permanent Open Market Operations),” Ferry said—while continuing to engineer a low interest rate environment.

It seeks to achieve the latter objective in part through forward guidance of where it will go with interest rates.

Though Bernanke has been clear that the asset purchases will unwind well in advance of an increase in interest rates, the market hasn’t listened.

Instead, it has pushed up the 10-year Treasury note yield past 2.8 percent from 2.33 percent when Bernanke delivered the first tapering comments. Yields also have risen in other global markets in response to the Fed’s anticipated course, with the decline in India’s rupee currency of particular concern.

This is the main danger with Fed policy—that day when the central bank begins to lose control of the rate structure and the market takes over.

Ferry said the Fed is actually subverting its goals through the use of forward guidance, which projects at this point that the Fed will keep rates where they are well into 2015. It has set a 6.5 percent unemployment rate and 2.5 percent inflation wall as the point where rates could start increasing, but Fed economic forecasting has been consistently inaccurate through the years.

 “Forward guidance is causing a spot on the horizon two years out, beyond which is chaos,” Ferry said. “I’m anti-transparency in this mode and anti-forward guidance, because forward guidance is holding down the feedback loop that markets will give the Fed.”

“What they’re saying is our forecasts go out the window after 2015, because the market doesn’t align with those forecasts now,” he added.

Markets will be paying special attention to the Fed this week as two important events hit: The release of minutes from the July meeting Wednesday, followed by the Kansas City Fed summit at Jackson Hole, Wyo., starting Thursday.

The minutes will provide a further peek into the mindset of the 12-member Open Markets Committee, which ultimately sets Fed policy under Bernanke’s guidance.

By contrast, any significant news out of Jackson Hole likely will move markets only because so little is expected, with Bernanke not attending and Vice Chairman Janet Yellen—a possible Bernanke successor—not on the docket to make any policy speeches.

“Changes in the minutes that would suggest a heightened probability of enhanced forward guidance could include many members emphasizing the importance of keeping the overall level of monetary accommodation high, despite a shift in the ‘mix’ of accommodation, to borrow Chairman Bernanke’s phrase,” Goldman Sachs economist Kris Dawsey said in a note to clients.

Dawsey predicted that the debate over QE against forward guidance “will continue to be a hot topic at this year’s (Jackson Hole) conference.”

A market looking for guidance is likely to susceptible to any level of surprise in policy.

“Investors need to get comfortable with the idea that the Fed is going to taper,” said Kristina Hooper, U.S. head of investment and client strategies for Allianz Global Investors. “We’ve had some time to digest it. And it’s going to happen eventually. But it’s also important to understand that monetary policy will remain accommodative and supportive of risk assets.”

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Why unloved Indian market is due for a bounce

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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A sharp sell-off in India’s equity market, hit by increasingly bearish sentiment towards emerging markets generally, now provides an opportunity to snap up shares in Asia’s third largest economy, some analysts say.

Indian stocks have plunged near 6 percent since Thursday, knocked down by a fall in the rupee to new record lows against the dollar and as foreign investors continue to ditch risky emerging-market assets amid fears of the U.S. Federal Reserve unwinding its monetary stimulus.

Many commentators said they would stay well away from from Indian assets right now, including Templeton Emerging Market Group’s Mark Mobius, who said Indian stocks were “not quite yet” a buying opportunity.

But some, such as Steve Brice, chief investment strategist at Standard Chartered bank, said Indian equities look attractive from a technical standpoint. “We like India. That’s where you could make the strongest case for a bounce because we have weakened so far and so fast,” said Brice.

India’s benchmark stock market has fallen near 10 percent since late May to about 18,246 points and its rupee is the world’s worst performing currency this year, touching fresh all-time lows against the dollar at 64.11 on Tuesday.

Brice said Indian stocks have traded in a range of between 18,000 and 20,500 in recent months and the fact that the index is now at the bottom of that range means it is at a “critical level” and could be in line for an uptick.

“Given the fact that we are oversold, any positive news that could come out from the macro or the policy side could see a short-term move higher… and if we get more negative news, a lot of it is in the price already,” he said.

Recent policy moves by India’s central bank have failed to shore up the rupee, further denting confidence in an economy already hurt by sluggish growth, high inflation and difficulties in pushing ahead with structural reforms.

Brice said a broad improvement in the international environment, combined with the fact that Fed tapering is now believed to have been priced into markets, should reduce the risk of further heavy losses for Indian stocks.

No big changes

“The way I see it the fundamentals of India have not changed,” said Keki Mistry, vice chairman and CEO of Indian financial services firm HDFC.

“We are still a very young country. What attracted foreigners to India 20 years ago is still the same…It will remain attractive in the medium to long term,” he said, referring to low penetration rates for financial services firms and mortgages.

Mistry told CNBC on Tuesday that despite the rupee’s sharp fall, sentiment was likely to turn around soon.

 “Sentiment will probably get better if we see some action from the government in terms of opening up some sectors to foreign investment…. coupled with some changes in policy by the Reserve Bank of India (RBI) where they step back on some of the measures they’ve introduced in the past month and they start easing liquidity in the system,” he said.

On Tuesday, the RBI announced a series of policy changes designed to reverse liquidity tightening measures implemented over the past month.

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First India, then Indonesia… who is next?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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As the selloff in emerging markets intensified in the past week, India and Indonesia were left the most severely battered and bruised. Now analysts are concerned of a domino effect that could spread to the rest of the region.

Richard Yetsenga, head of global markets research at Australia’s ANZ bank, told CNBC that India’s troubles represent a “great microcosm” for what is happening in emerging markets right now.

“India is a microcosm in the sense that nothing domestic occurred to trigger this latest move,” he said.

“India’s current account deficit and budget deficit have been very wide for at least two years. It’s only when US bond yields really started going up and the free money tap turned off that it started to be manifested in the currency,” added Yetsenga.

Yetsenga said he expects India’s fallout to be repeated across other emerging market economies, with those with high levels of external leverage being hit first, but then possibly spreading to other markets with high degrees of internal leverage.

“The cost of capital has gone up and that’s causing issues everywhere. In that sense all of Asia is exposed to a higher global cost of capital,” he noted.

“Places like Malaysia and Thailand have had particularly strong credit growth in the last couple of years, so they look fine from an external perspective but they have a high degree of internal leverage,” he added.

He added that Singapore and Hong Kong’s overvalued property markets also left them exposed.

“So there are a few other economies where you are likely to see the higher cost of capital have an impact,” added Yetsenga.

Other analysts also flagged Malaysia as one country highly exposed to Fed tapering and rising Treasury yields. The country’s currency – the ringgit – has fallen nearly 8 percent this year to a 3 year low, with selling accelerating last week in tandem with the emerging market selloff.

“We are seeing some concerns creeping in about Malaysia,” said Frederic Neumann, MD and co-head of Asian economics research at HSBC.

“Malaysia’s seen a dramatic deterioration of its current account surplus and…there’s also suspicion that the underlying efficiency of the economy has deteriorated and that the government hasn’t doesn’t enough structural reform to turn around the trend in declining productivity growth,” said Neumann, adding that outside of Asia, Brazil and Turkey were also cause for concern.

However, Neumann added that he did not think it was a good idea to group all emerging markets together as one, and there were some economies that he believed would prove resilient.

Also Read: Why Sensex, rupee are crashing: Mkt has lost faith in UPA

“I’m not sure this (concerns of an India-style crisis) applies to all emerging markets, if you look in Asia, the Philippines appears to be in much better shape, so is South Korea, and I think despite the recent sell-off, Thailand is as well,” he said, referring to the losses of 3 percent on Thailand’s benchmark equity index on Monday.

Copyright 2011 cnbc.com

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India ‘not quite yet’ a buying opportunity: Mobius

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Valuations in India`s equity markets are cheap but need to fall further to represent a buying opportunity, Mark Mobius, executive chairman of Templeton Emerging Markets Group, told CNBC exclusively on Tuesday.

“Not quite yet,” Mobius warned, when asked if recent sharp stock market declines marked a good entry point for longer term investors. “Indian markets have not fallen far enough to make them attractive.”

India is beset by high inflation, slowing growth, a ballooning current account deficit and a record low currency. At the core of the problem – foreign capital outflows precipitated by expectations cheap liquidity will come to an end with the September wind-down in the US Federal Reserve`s asset purchase program.

India`s NSE index fell nearly 2 percent on Monday to its lowest close in 11 months, as blue chips slumped after a record low rupee aided fears of foreign selling and more steps by the central bank to stem dollar outflows.

Mobius, who manages USD 53 billion, said he “likes and holds” Tata Consultancy Services and would add to positions if the stock fell 10 to 15 percent further. From the consumer sector perspective, Mobius said he would buy Hindustan Lever – a stock that he currently doesn`t own – if it fell 20 percent further.

More pressure is in store for India`s currency, Mobius warned. “With the US dollar getting stronger, the rupee could get hit further,” he said, adding “significant declines” may be on the horizon unless controls were imposed to limit capital outflows.

India is “moving definitely in that direction but I hope common sense prevails,” Mobius said of the risk of further restrictions on foreign investors aimed at preventing them from moving funds out of the country.

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Here’s why Egypt-led oil rally may falter

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Benchmark global oil markets may already fully reflect the risk of political instability worsening in Egypt and the spill-over effects on the broader region, implying further oil price gains may be limited in scope this week, traders and analysts told CNBC.

Oil prices are still likely to drift higher this week, CNBC’s weekly sentiment survey showed, though fundamental investors may try to blunt the advance believing current prices don’t reflect well-supplied markets and a slowdown in major emerging market consumers such as China.

“There is still too much oil,” said Thomas McMahon, Director of the Pan Asia Clearing Enterprise and former chief executive officer of the Singapore Mercantile Exchange. “But cheap dollars, technical disconnect and Egypt seems to be sweeping this aside. Common sense and supply demand will prevail but maybe not this week.”

Both Brent crude and US oil futures ended higher for the sixth straight session on Friday, with Brent posting its biggest weekly percentage gain in six weeks as turmoil in Egypt and Libya stoked worries about oil supply security, Reuters reported.

Brent crude oil futures for October delivery finished Friday 80 cents higher at USD 110.40 a barrel. Brent gained 2 percent on the week, its largest weekly percentage gain since the week to July 5.

US crude oil for September delivery settled 13 cents higher at USD 107.46, after trading as high as USD 108.17. US oil futures ended 1.4 percent higher on the week.

 Suez Canal

CNBC’s weekly sentiment survey showed 70 percent, or fourteen out of 20 respondents, believe prices will gain this week. A quarter, or five out of 20, say prices will fall while one expects the market to trade at around current levels.

“Some risk premium has been built into markets for the situation in Egypt,” said Ric Spooner, Chief Market Strategist at CMC Markets in Sydney, who expects prices to fall this week. “However, further upside from this source is limited unless the market gets more tangible evidence that Suez may be disrupted.”

The Suez Canal, a critical sea route for 4.5 percent of global oil supplies linking the Red Sea with the Mediterranean, remains open as does the Suez-Mediterranean (Sumed) oil pipeline.

Tom Weber, Senior Commodity Advisor at Portfolio Managers Inc., said though a Suez closure is a “remote possibility – barring a marked loss of military control, it makes a great bullish headline.”

Weber added: “Bahrain shows some unrest and I think most oil traders’ conclusion is that there will be no scenario where Iran backs off their nuclear program.”

Despite crushing the 2011 uprising, Bahrain, home to the US. Fifth Fleet, remains a focus of a battle for regional influence between Shi’ite Iran and Sunni Saudi Arabia, Reuters reported.

Majority Shi’ite Muslims have been demanding more democratic reform from the ruling Sunni al-Khalifa family for two-and-a-half years.

Driven by “Tamarrod” (Rebellion), a loose association of opposition activist groups which coalesced in early July, dozens of rallies were held last week across the country, Reuters reported on Sunday.

“Unrest in Bahrain worries me,” said David Kotok, Chief Investment Officer at US. money manager Cumberland Advisors, with USD 2.3 billion assets under management.

Arguably more so than Egypt and Bahrain, bullish respondents point to a crippling oil workers’ strike in Libya as price-supportive.

Libya is threatening to use military force to bring order to its oil sector, where a strike by guards – now in its third week – has dealt a heavy blow to its fragile post-revolution economy, Agence France-Presse reported on Monday.

Oil exports plunged by more than 70 percent at the end of July after guards, including rebels who helped topple dictator Muammar Gaddafi two years ago, forced terminals to shut, AFP reported.

 “All eyes are on Libya,” said David Nevin, an energy broker at Xconnect Trading Ltd. in London. “A reopening of the ports there should see some long liquidation.”

From a technical perspective, both US futures and Brent are heading towards some key upside levels and may encounter resistance, survey respondents said.

“WTI (West Texas Intermediate, the oil grade underpinning the US crude futures contract) is within a trend channel with resistance around USD 108/USD 108.50,” CMC Markets’ Spooner said. He added WTI will struggle to break those levels “with overall inventory and production levels relatively high and given the possibility of US dollar strength on (Fed) taper concerns.”

 ‘Overbought’

Xconnect Trading’s Nevin said that while the market is admittedly “overbought” in the short term, further gains may not be entirely ruled out. “We remain cautious at these high numbers. With the market overly long, a turnaround will be vicious.”

Technically, the market broke Nevin’s initial Brent target of USD 110.30 and USD 110.64 represents the next hurdle that needs to be cleared to open the way to USD 111.20 and beyond, he said, recommending buying the dips on the Brent-WTI spread. “The market feels like a bubble at the moment and is overly long in my opinion,” he said.

 For WTI, the September crude oil contract expires this Tuesday, spelling volatility ahead in the front-end of the futures market, said David Greenberg of Greenberg Capital LLC.

“Sept. Crude goes off the board Tuesday,” Greenberg said on Twitter. Expect “low volume in the contract” and prices that “can be pushed around on air.” The October contract, the more actively traded contract on Friday, settled 10 cents higher at USD 107.29. 

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow