Current oil prices are on the rise, and gas prices have followed suit. Recently, we filled our tank and paid $4.19 per gallon for the lowest grade available. What’s going on?
According to the President, high oil prices are a result of speculators manipulating the oil futures markets. “It’s true that a significant factor driving up oil prices is not a shortage of supply. There’s enough oil to meet global demand,” President Obama stated during a reelection campaign event in Annandale, Virginia.
“The issue lies in the fact that oil is traded on global markets, where speculators make various predictions. They think, ‘There’s maybe a 20 percent chance that something will happen in the Middle East that disrupts oil supply.’ This leads them to bet on higher oil prices, which significantly spikes costs.”
While the President attributes rising oil prices to speculators, we take a different view. With the escalating possibilities of turmoil in the Middle East, aren’t oil futures traders merely responding to real risks in their line of work?
To explore several worst-case scenarios unfolding in the Middle East and their effects on oil prices—along with potential profit opportunities—we present a guest essay by Marin Katusa, Senior Market Strategist at Casey Research.
Best wishes,
MN Gordon
Economic Prism
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Oil Hits 32-Month High As Unrest Persists in the Middle East
The civil unrest in Libya has now entered its third week [as of April 14], with Egypt slowly moving toward free elections and hundreds dead due to anti-government protests in Syria, Yemen, and Bahrain. The Middle East is rife with instability. On April 6, this turmoil drove the spot price of Brent oil above $123 per barrel, marking a peak not seen since August 2008, when prices were plummeting from an all-time high of $147.50 just before the financial crisis.
The Organization of Petroleum Exporting Countries (OPEC) faces pressure to intervene but claims it is already doing all it can to quell the price surge. “OPEC can only provide the market with the oil it needs, and it is fulfilling that role,” stated Hussain al-Shahristani, Iran’s Deputy Prime Minister for Energy Affairs, at a Paris oil conference. “We haven’t observed any slowdown in growth.”
Indeed, OPEC members like Saudi Arabia and the United Arab Emirates (UAE) have ramped up their daily production to offset the lost output from Libya. Consequently, daily OPEC production fell by only 300,000 barrels per day in March, even with a loss of 1.6 million barrels per day from Libya. OPEC has concluded that the market dynamics are disconnected from the realities of supply and demand and instead are driven by political unrest and apprehensions.
“We have little capacity to control prices,” expressed Mohammed bin Dhaen al-Hamli, the UAE’s oil minister. “The market must focus more on actual supply rather than perceived shortages. International markets are ignoring fundamentals and placing bets on dire predictions.”
This might be the case; however, several dire scenarios remain highly plausible. Although OPEC can temporarily compensate for Libya’s production loss, its ability to sustain this depends on the stability of fundamental relationships throughout the Middle East, which are currently under threat.
Key questions arise concerning Egypt, the most populous Arab nation and a historic player in culture and regional politics. If Egypt successfully transitions to democracy, it may serve as a model of stability for the surrounding areas. Since the resignation of Hosni Mubarak on February 11, the Egyptian revolution has received less media coverage amid the crises in Libya and Japan, even though progress is being made.
Voters approved amendments to the constitution that aim to broaden the political landscape. A new president will be limited to two terms, and restrictions on candidacy have been lifted. Parliamentary elections are set for September, with presidential elections soon to follow. The interim military council currently steering the nation seems reluctant to cling to power for too long.
However, the rushed voting timeline favors established parties like the Muslim Brotherhood and Mubarak’s National Democratic Party. Those who fueled the revolution are still working to form organized political parties. Meanwhile, a reduced police presence has led to rising crime rates, and the vital tourism sector is struggling, prompting the finance minister to halve the country’s projected growth rate for the year to just 2.5%.
Foreign policy issues loom as well. Egypt has stated it will honor its international treaties, including the landmark 1979 peace agreement with Israel. This treaty marked Egypt as the first Arab nation to recognize Israel and prompted the United States to establish economic, military, and political relationships with it. This agreement holds significant importance in the Middle East and has long established Egypt as a mediator between Palestinians and Israelis. Yet, Cairo recently announced plans to renew diplomatic ties with Iran after a break of over 30 years, questioning whether this connection might impact Egypt’s mediating capabilities.
Next, we turn to Syria, which, though often overlooked, carries substantial weight in the region. It has been gripped by its own political uprising for three weeks now. The very act of citizens protesting is significant, given that Syria is one of the Arab world’s most repressive autocracies. The ramifications of a regime change in Syria could be profound.
Syria’s primary allies are Iran and the Lebanese Hezbollah militia, forming a united front against Israeli and American ambitions while seeking to destabilize Lebanon and support Hamas rule in Gaza. In recent years, the alliance with Turkey has strengthened, with Damascus becoming central to Ankara’s strategic Arab policy. Should a post-Mubarak Egypt cease its unwavering support for Israel, tensions could escalate between Egypt and Syria. If instability strikes Syria, it could create a power vacuum, dramatically altering the precarious balance in the Middle East.
Syrian President Bashar al-Assad continues his father’s 30-year legacy of authoritarian rule, which has been marked by brutal repression often described as “the deadliest act by any Arab government against its own people in the modern Middle East.” In 1982, Hafez al-Assad ordered a merciless response to an opposition movement led by the Sunni Muslim community in Hama, resulting in mass civilian casualties estimated between 10,000 and 80,000.
Since then, dissent in Syria has been significantly suppressed. Hafez passed away in 2000, passing the presidency to Bashar, who promised reform but has maintained a zero-tolerance approach to opposition, tightening control over free speech and the Internet while preserving strong ties to Iran.
There’s further evidence of Bashar’s unwillingness to cede control: Syria has been under a state of emergency for 48 years, enforced since the Ba’ath Party seized power in a coup. This law effectively nullifies constitutional protections, allowing the government to make preemptive arrests and detain suspects without charges, denying them the right to legal counsel. The Assad regime has invoked the threat of war with Israel to justify this lengthy suspension of rights.
A 2009 State Department report highlighted serious human rights violations in Syria, including unlawful killings, enforced disappearances, and estimates of 17,000 missing persons. Reports from Syrian prisons detail torture methods ranging from electric shocks to sexual assault.
Despite this brutal authoritarian rule, Syrians are beginning to rise against the regime. Demonstrators are calling for basic freedoms, political and economic reforms, the release of political prisoners, and the end of emergency law.
In response, President Assad has wielded a heavy-handed approach. Government forces have killed over 100 individuals, with many shot during peaceful protests by snipers positioned on rooftops. Protesters report that their members are often arrested, beaten, and sometimes even killed. Meanwhile, Assad has blamed Israeli provocateurs and foreign agents for the violence—anything but his own forces.
In this scenario, a family from a minority group continues to rule over a majority of different religious sects. The Assad family belongs to the Alawite faith, a branch of Shiite Islam comprising only about 11% of Syria’s population, while the remaining 22 million residents are predominantly Sunni Muslims. Adding to the tensions, the Assad regime has denied citizenship to the 1.5 million-strong Kurdish minority, leaving them without access to jobs or education.
Assad knows well the sectarian divisions within Syria and has filled the army ranks with loyal Alawite supporters. This differs from the military forces in Tunisia and Egypt, which largely refused to confront non-violent demonstrators, leading to the downfall of their autocratic rulers. Many senior Syrian military officers understand their fates are tied to Assad, resulting in their unwavering loyalty to the president.
To date, Assad has shown an iron fist cloaked in a velvet glove. He has alluded to reform but has provided minimal concrete proposals, urging patience among the populace while continuing to authorize lethal force against protesters. The delicate balance he’s attempting to maintain is precarious and unsustainable.
Syria plays a crucial role in the dynamics of Iran, Iraq, Turkey, Lebanon, Palestine, and Israel. Its internal strife threatens to disrupt the existing equilibrium, contributing to a heightened atmosphere of insecurity and potential violence in the region. Moreover, Syria’s issues highlight one of the most significant threats in the Middle East: sectarianism.
Many Middle Eastern nations are constructed on a complex mosaic of religions, sects, and ethnicities, often held together by governments that exploit these divisions to retain power. A breakdown of order between Sunnis and Alawites in Syria could ignite sectarian wars across neighboring territories, exacerbating instability throughout the region.
In summary, multiple scenarios are unfolding in the Middle East, with few, if any, promoting stability. If oil traders and analysts concentrate on worst-case scenarios, they are simply fulfilling their responsibilities in analyzing the market.
That said, significant developments in the region are unlikely to transpire overnight. The impact of Libya’s output loss has already been factored into market prices, leading traders to hesitate before further escalating prices in the current rally. In the longer term, however, many industry leaders anticipate that instability will resurface and drive prices higher once again.
According to a Reuters survey of 32 major oil traders, bank analysts, and hedge fund managers conducted in the first week of April—following Brent oil’s surge of $8 over five days to surpass $120 per barrel—two-thirds of respondents expect the current rally to subside soon but predict that oil prices will soar above $130 per barrel in the latter half of the year. One in five believe oil could even reach $150 per barrel by year’s end.
While we often grumble about opportunistic traders driving up oil prices, it’s essential to recognize that the world’s most vital oil-producing region is undergoing profound changes, the outcomes of which are nearly impossible to foresee. Uncertainty breeds increased commodity costs, and for at least the remainder of the year, uncertainty will be the defining characteristic of the oil market.
Yours sincerely,
Marin Katusa
for Economic Prism
[Editor’s Note: Investing does not occur in isolation. That’s why Marin Katusa and his Casey Energy team remain attentive to current events, analyzing complicated political and market situations to uncover the best profit opportunities in the energy sector. Given the spike in oil prices, one often-overlooked renewable energy source stands to gain significantly. Learn more here.
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