Markman: How the Mideast Turmoil is Affecting Oil Prices

Top analysts point to more drama on the horizon beyond Libya, Syria

   

The world price of oil will plunge by as much as $15 per barrel if NATO forces either kill Libyan strongman Muammar Qaddafi or send him into exile. A transitional government would quickly work to get Libyan sweet crude back into production, and a big kink in the global oil supply would be straightened out. In addition to the improved supply of oil, the move would help evaporate some risk premium.

But now I want to point out the potential for a renewal of the risk premium. There is really a tug of war right now and there’s no telling how it’s going to be worked out. It may not help us determine what stocks or ETFs to buy right now, but they will give us perspective as the kaleidoscope changes.

Two key Mideast countries are on the verge of outright civil war.

First is Yemen, where the Western-friendly president has been sent packing to Saudi Arabia. There are armed gunmen roaming the streets of the capital, Sanaa, and the president’s forces are battling rebel militia. Second is Syria, where the government contends that 120 of its police were ambushed by men with hand grenades and machine guns. Protestors are claiming that the government has killed more than 1,300 of its citizens since mid-March.

If the United Nations or NATO decide to try to stop the Syrian government from butchering its own people, like they have in Libya, what will be the effect? TIS Group analysts in Minneapolis argue that if Syria passes out of the hands of the Assad family, which is allied with the Alawite branch of Shia Islam, Russia could lose its new naval base on the Mediterranean, and Israel will face renewed instability on its northern border. TIS analysts point out that oil production in Syria, now around 400,420 barrels a day, will start falling if fighting intensifies.

Other energy-affecting factors swirling in the Mideast and Muslim-aligned world: Pakistan is starting to lean away from the United States and toward China; Saudi Arabia has essentially annexed Bahrain; the Muslim Brotherhood is gaining strength in Egypt.

In this context, here is what we need to know, according to a top energy analyst:

First, Syria sits at the heart of the Middle East. If the regime falters, it will have major implications in the region. It is considered a client state of, and proxy for, Iran and a major rival of Egypt, Iraq and Israel.

Also, Syria has been extremely repressive but stable. The current president’s father, Hafez al Assad, was actually a fervent opponent of Islamic fundamentalists, and reportedly slaughtered 20,000 people in a single district to put down a rebellion.

Next,  If Syria breaks down into utter chaos, expect instability to spill over into Lebanon, where a renewed civil war could emerge. One feature of Lebanese civil wars has been renewed hostility toward Israel by Hezbollah, which has threatened to fire thousands of missiles again into its southern neighbor.

Civil wars in Syria, Lebanon and Libya at the same time could thus morph into a battle against Israel, as it has been the scapegoat for the region’s leadership for decades in times of stress.

Finally, Lots of ifs here but the point is that a resolution of conflict in Libya would likely lead to lower oil prices. But a major flare-up of fighting in Yemen, Syria and Lebanon, with threatening overtones toward Israel, would likely lead to a restoration of the instability premium to oil.

xle chart Markman: How the Mideast Turmoil is Affecting Oil Prices

This is probably why energy stocks have been largely stable in the past two weeks after an abrupt decline from their April high. You can see in the chart here that they have also retained more of their outperformance since September 2010 than any other major sector.

Bottom line
: If all the oversold readings on the broad market do in fact lead to a rebound in the next week or two, the relative outperformance of energy stocks – and the prospect for a renewed instability premium for oil — makes them a prime candidate for a overweight position going forward. But do not jump the gun. Let’s wait for one of the signs of a sustainable bottom that I have mentioned: At least one 90% upside day, and preferably two, to kick off a surprise summer rally.


Article printed from InvestorPlace Media, http://investorplace.com/2011/06/mideast-turmoil-crude-oil-prices-syria-markman/.

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