Red Zone in the Middle East: Politics and The Oil Market

Middle East Politics and The Oil Market
Red Zone in the Middle East: Politics and The Oil Market

It might be time to get a little nervous if you’re an Aussie and travelling to Europe or the Middle East anytime soon.

The Telegraph reports that the United Arab Emirates (UAE) is warning that Yemeni rebels are capable of striking Dubai or Abu Dhabi.

That’s a concerning thought…because Dubai and Abu Dhabi are tourism and business hubs.

The Sydney Morning Herald also reports that two flights were diverted on Sunday from Dubai airport due to suspicious drone activity1.

These Yemenis are the group that claimed responsibility for the recent attack on Saudi Arabia.

Why would the UAE be a target? The emirate supports the Saudi war in Yemen.

The shifting alliances and conflicts of the Middle East are coming back to centre stage.

This is not the only flashpoint…

Don’t forget the Saudis and the UAE (alongside Egypt and Bahrain) have been isolating and blockading Qatar since 2017 too.

We have no way of knowing where this messy situation heads…but any escalating conflict is going to show up in the price of oil.

It’s also showing up in American foreign policy.

Iran: in the crosshairs

The US is now sending military forces and hardware to the Gulf and placing further sanctions on Iran’s central bank2.

The same bleat is heard all across the mainstream press: Iran is behind the Houthi rebels and the attack on Saudi Arabia.

Is it true? We have no way of knowing. Believing anything in the mainstream press is a ludicrous proposition.

US history says there is always some foreign misadventure on the cards to justify the huge military contracts doled out every year.

Gore Vidal said it best…’it’s perpetual war for perpetual peace’.

If it wasn’t Iran…well, they’d go find another country!

(That reminds me — are we still supposed to be scared of North Korea?)

One can’t help but feel Iran is in danger of going the way of Libya.

Do you remember this?

It was a reasonably secure country before the NATO intervention in 2011. It had free healthcare and education.

Now it’s a failed state and racked with civil war.

What did the intervention achieve? I have no idea.

I do remember there was a suggestion that Gaddafi (the former Libyan leader deposed in the intervention) was proposing a gold-backed pan-African currency to displace the US dollar.

Tut tut. All world leaders got the point immediately. Don’t mess with this.

Indeed, part of the reason the US guarantees Saudi Arabia’s security in the first place is because the kingdom recycles its petrodollars into US government debt.

That helps makes the dollar-based system and gigantic US government deficit look sustainable.

Here’s a point on that…

The Middle East is still important

Donald Trump likes to say that the United States is now energy independent.

Then why send American troops and treasure to protect a desert monarchy that assumed power — and extraordinary wealth — via force of arms?

One reason is because of the oil-dollar connection. The second is that the United States is not energy independent.

Its refining system was built to process Middle East grades. A lot of US oil needs to be exported.

Again, we return to the idea that oil is the story to be watching for the next six months.

As far as I’m aware, nobody else is following this.

It makes me attentive to the slightest relevant news.

Take, for example, the following point. One of the key pipelines in Nigeria is currently shutdown.

This pipeline carries an oil grade known as Bonny Light. The refiners of the world highly prize this because it is low in sulphur.

But militants repeatedly attack it in their war on the Nigerian government.

And so another little stress gets added to the market.

Oh, and what’s this?

One snowflake can cause an avalanche

Texas, the heart of the US oil industry, is currently being flooded — causing refining shutdowns.

How many more of these disruptions and difficulties can the oil market take?

Venezuela and Iran are under US sanctions.

Saudi Arabia’s spare capacity has just been knocked out.

Nigeria and Libya are in a constant simmer of infighting.

The market could stay somewhat sanguine about these for most of 2019 because the fear of recession has dominated so much of this year.

But the world has proved a little more resilient than presupposed.

The narrative could change very shortly…and suddenly the world could be looking at rising demand and constrained supply.

Then it would only take one more wildcard to knock out another source of oil and the price could spiral up.

Point being: I don’t see any of this pressure subsiding anytime soon.

Energy stocks are a buy.


Callum Newman Signature

Callum Newman,
Editor, Profit Watch