Tuesday, February 22, 2011

Will Libya Halt Oil Production?

The market is trading lower this morning amid fears surrounding the turmoil in Libya. Libya has the largest oil reserves in Africa, so that is where we are seeing the most concern. Oil prices have spiked all the way to $95, and there is concern that prices could hit $100.

If oil continues higher and prices at the pump here in the U.S. begin to approach $4, that could be a headwind for the economy and dampen consumer spending. But let's see what happens with Libya first.

The usual flight to safety is on. Investors are flocking into Treasuries, pushing the yield on the 10-year yield down to 3.50%. Gold prices are also rallying, as buyers push prices back above the $1400 level.

In economic news, Consumer Confidence for February was released this morning, and hit its highest levels in almost three years at 70.4 (vs. 67.0 consensus). Rising consumer confidence would be a nice boost for the economy.

Asian markets were lower across the board overnight, with most markets down in excess of 2%. News that Moody's lowered the outlook for Japan only exacerbated the selling.

For its part, the volatility index (VIX) is spiking +14% higher this morning to 18.70.

Trading comment: The market was overbought coming into today, and obviously due for a correction. If oil prices continue higher, then this could turn into a deeper pullback, but if the Libya situation is contained I don't think this will be more than a normal consolidation. At this point, I think it is likely buying comes back into the market before anything more than a 2-3% dip. But for now, I am holding off on new buys, hoping for a little more of a pullback in prices.

long VIX calls


Post a Comment

<< Home