Category Archives: Middle East

Oil’s Rocky Road —  As the week started off, many traders took the Goldman Sachs report on oil to heart. After a reevaluation, GS has reported that crude should return back to the sub $100 level. Selling of the long contracts began immediately on Sunday night as the Asian markets opened, leading to a steep retreat as oil sank from $113 per barrel to $108 for the day. The Monday open showed some strength, but the gains were lost in the afternoon. From the technical angle, this is a natural pull back and the technical traders would remain bullish, noting the bounce off of the 20 day MA, and a positive turnaround in the stochastics.

Interestingly enough, many institutional investors and hedge funds have jumped into oil in the past few weeks. This has led to a prop up in the premium for oil. If oil volatility continues, this premium will come down as quickly as it has run up. News from Libya and the Middle East now has less emphasis, as NATO headlines become third page highlights on the WSJ. As for the rest of the energy sector, uranium and natural gas still look like attractive at these levels.


Egyptian Stocks Advance Most in 15 Months, Lead Middle East Equities Rally -


Libya — Its been almost a month since Libya’s hated leaders called its people cockroaches and asked his supporters to ride the nation of them. Since then Qadaffi has killed many of its citizens and hasn’t been blamed for it since recently. US and European forces stepped into take control but it has been atleast a week and still Qadaffi seems intact. In the meanwhile, oil prices are fluctuating up and down, but the trend is mostly up. Also with summer approaching, the oil prices will skyrocket on top of the already high price for barrel. If Libya is liberated, will this effect the oil prices, or will the conglomerates of the oil industries use Libya as an excuse to keep the oil prices up. I fear the second is most likely happening.


Oil Hysteria - Over the past several weeks, investors witnessed the dramatic rise in the price of oil, which now sits above $100 a barrel. The unrest in Libya, which was influenced by the revolutions stemming from neighboring North African nations Egypt and Tunisia, have led some investors to believe that oil prices have the potential to hit $150/barrel. Some traders are even betting on oil prices rising to $200/barrel. If such a thing were to unfold, history tells us that we should be afraid. Shocks in oil prices have led to or were significant contributors to past US recessions, most notably in the mid-1970s, 1980, 1990, 2001, and 2008-2009. Should the turmoil in North Africa spread to countries in the Middle East, such as Saudi Arabia, which produced nearly 9.1 million barrels of oil a day in February, then such price rises and ensuing pandemonium may be quite likely.

Though such concernment is valid, I am here to write about why such occurrences are unlikely and possibly overblown. The increase in oil prices due to disquiet in Libya has already been priced in and the cut in supply from 1.4 million barrels of oil per day produced by the strife-ridden nation to a paltry 300,000 barrels of oil per day is sustainable due to an excess supply of nearly 4 million barrels per day produced by Saudi Arabia. Furthermore, the so-called Saudi ‘Day of Rage’ was exaggerated and demonstrated the robustness of the Saudi government against unrest and political outcry. Though the minority Shia population continues to be critical of the current regime, King Abdullah has offered concessions in an attempt to insulate the country from riots and revolutions. And so far, there have been no serious uprisings from the major oil exporter. Though there may be a slight slowdown in the US growth rate, any major downturn is improbable. The automotive sector and overall US consumer spending may be hindered from the current rise in oil prices, but we should continue to expect great earnings from corporations, positive economic numbers, and overall bullish sentiment.

A brief look at the situation in Libya — In terms of recent events, the on-going chaos in Libya has been causing quite a stir. Its president has resided in the position for 42 years (!!!) and not surprisingly has resorted to violence and military power to suppress the people. This has been causing quite the stir in the markets and I thought I’d just add my two cents on what kind of impact it has / is going to have.

One thing that is interesting to me is the momentum the Middle East has been on in terms of protests against the government. Even if the situation in Libya stabilizes, another incident may not be too far away. Most times, these sorts of events tend to be negative indicators for the market but most of the drop I feel is due to investor fears and mainly not following from the fundamentals. Because of this, I think volatile events like this are a good time to buy, particularly during a day where a decrease in the market is likely due to news associated with Libya.

There are certain scenarios that can play out though that may throw this for a loop. For instance, trade sanctions currently being enforced against Libya will cause spikes in prices of commodities and the situation can even worsen. This will cause downward pressure on the US economy and it is unknown when prices will go back to normal if at all even if Libya’s situation stabilizes.

Another cause for concern is how the armed forces, in particular for the US, will react to continued violence and armed resistance. By itself it may not cause much impact on the global economy but it’s possible that its influence in the Middle East may be enough to send other countries around it into chaos. So the black swan in this case is the particular set of events that have catastrophic consequences for the global economy. Personally, I wouldn’t put too much merit in this sort of idea unless the situation remains stagnant or continues to get worse over an extended period of time.

Overall, I would still say that this situation creates more investing possibilities and one should not be hesitant to participate even if the outlook may seem bad.

12 Things Saudi Arabian King Abdullah is Doing to Quell the Spreading Unrest — Given all that is going on in the MENA region (Middle East / North Africa) and the fears that it will spread to Saudi Arabia, I thought it made sense to actually list the things that King Abdullah is doing to prevent this from happening.  The bulk of the items in the list below are part of the $36bln in spending programs announced by King Abdullah a few weeks ago.

1) King Abdullah has announced structural reforms at the political level including ministerial reshuffling as well as opening a dialogue on a possible move towards a constitutional monarchy.

2) Extension of the inflation allowance for the country’s public servants at an estimated cost of $8.5bln.

3) Increase the budget of the country’s housing fund by approximately $11bln and raise the housing sector budget by $4bln.

4) Raise the capital of the Saudi Credit Fund (SCF) by $8bln to support lending to small and medium businesses and cancel two yearly installments for clients of the credit bank.

5) Inject an additional $270mln  into the budget of the Social Security Fund.

6) Increase the budget of charitable organizations by 50% as well as inject $2.5mln to every literary club and professional association as well as providing increased support to sports clubs.

7) Support needy students at universities and cover all stipends of students studying abroad to the King Abdullah Scholarship program.

8) Confirm a 15% inflation allowance to become part of the basic wages of public sector employees which is effectively a 15% increase in public sector wages.

9) Create 1200 jobs to support supervisory programs.

10) Defer loan payments for a large number of individuals who are currently in jail.

King Abdullah Throwing Money at the Problem

11) Provide a one year unemployment allowance for individuals looking for employment.

12) Increase wheat reserves to cover Saudi Arabia’s needs for a full year instead of six months.



Middle East Crisis - Saudi Arabian Tanks???? Too much exogenous risk

Tanks on their way to Bahrain? - Rumors flying that Saudi Arabia sending tanks in to Bahrain. Just rumors. But this is how these things start the downward spiral. Bahrain decides to free a Shiite activist, and sure enough he warns of violence. In fact his exact words were “My anticipation is that the situation will lead to more bloodshed”. Iran is kidnapping opposition leaders. Libya’s civil war doesn’t seem to be ending any time soon. I had though Kaddafi would be dead by now but clearly I underestimated his firepower. Sanction and expelling him from the UN will accomplish nothing. The Middle East will deteriorate before things get better. Even Egypt is still a mess. What a great sign for the management of the Suez canal, that the first act of the new management is to allow Iranian warships through, something we have not seen in over 30 years. Given that half of Egypt’s population is under the age of 30, it is a brand new world for them. One in which Iran is apparently viewed through a new set on lenses. The wealthy Arab buying binge that we have seen this past decade is coming to en end. Our own consumers will soon give pause to their spending habits as they watch the price of gasoline drive higher than $4 a gallon. I know I will. Yemen is perhaps the most unnerving in that it will ultimately become a breeding ground for al-Qaida. As I write this I see that Fitch has downgraded Libya 3 more notches. Isn’t that ironic that they continue to be a reactive agency. I personally believe that just the mere possibility of issues spreading to Saudi Arabia would require a negative watch out of the ratings agencies for possible downgrades. They were quick to do it for the Spain, Portugal, Greece, and Ireland. The domestic media seems to steer clear of the massive coverage of the Middle East, that isn’t to say that they aren’t covering it, it is just not as big a deal as say the OJ Simpson trial, Or the giant recall of Toyota’s automobiles. Finally our own government seems completely befuddled by all of this. How could they not be. We have apparently been backing the wrong guys; our greatest concern seems to be oil and then human rights. Hillary Clinton is the wrong person for the crisis we are facing and Obama has zero experience in this arena. Folks, we have a serious problem and we all seem to want to ignore it. If you believe the crisis in the Middle East has no impact on us, like I hear many say, please think again. The flash crash occurred on the day we all watched Greek protestors clubbed in the street. Portugal and Greece debt issues dropped the markets over 10%, what do you think will happen in an all out Shiite and Sunni battler in some of the realms of the most important oil producers in the world. One of my greatest concerns is what we don’t know. We don’t know how much exposure the European banks have to the Middle East. We do not know what changes the new Egyptian government will make to it constitution and to its peace treaty with Israel. And we don’t know where to park the fifth fleet, when Shiites gain a political voice in Bahrain and potentially kick us out.

The positive consumer numbers we have seen recently were pre the Middle East crisis. I expect the next set of numbers to tell a different story. We will not get the leadership in the market as we have in the past from names such as Goldman Sachs and Apple. It is the Oil and energy name that are supporting the indexes. That trend typically breaks, as the underlying commodities will disconnect from the equity related names. $120 oil will not translate to higher stock prices for XOM and CVX.

I will save my bearish thoughts on our domestic issues for my next blog.

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