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Guest Post: Oil Hits 32-Month High As Unrest Persists In The Middle East

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Submitted by Marin Katusa of Casey Research

Oil Hits 32-Month High As Unrest Persists in the Middle East

With the civil war in Libya now entering its third week, Egypt moving
haltingly towards free elections, and hundreds dead in Syria, Yemen and
Bahrain after a month of anti-government protests in each country, the
Middle East is rife with instability. On Wednesday, April 6, that
instability pushed the spot price of Brent oil above US$123 per barrel, a
high not seen since August 2008 when prices were crashing from an
all-time peak of US$147.50 on the eve of the financial crisis.

The
Organization of Petroleum Exporting Countries (OPEC) is brushing aside
pressure to act, saying it is already doing all it can to subdue the
rally.

“All that OPEC can do is provide the market with the oil it
needs, and it is doing that,” said Hussain al-Shahristani, Iran’s
deputy prime minister for Energy Affairs, at a Paris oil conference. “We
have not seen any slowdown in growth.”

Indeed, OPEC members Saudi
Arabia and the United Arab Emirates (UAE) have increased their daily
production to make up for lost production in Libya. The moves mean daily
OPEC output fell by only 300,000 barrels per day (bpd) in March,
despite the disappearance of 1.6 million bpd from Libya. On this basis,
OPEC has concluded the market is divorced from the realities of supply
and demand and is instead being driven by political upheaval and fears.

“There
is little we can do in terms of price control,” said Mohammed bin Dhaen
al-Hamli, the oil minister for the UAE. “The market should pay more
attention to real supply rather than imagined shortages. International
markets are choosing to ignore market fundamentals and bet on the
worst-case scenarios.”

That may be the case. Unfortunately,
several worst-case scenarios remain very likely. OPEC may be able to
make up for lost Libyan production for now, but that ability depends on
fundamental relationships behind the Middle East remaining stable. And
those fundamental relationships are in jeopardy.

The first
questions concern Egypt, the most populous Arab country and a historic
giant in terms of culture and regional politics. If Egypt can manage a
reasonably smooth transition to democracy, it will act as a model and
stabilizer for the entire neighborhood. Since Hosni Mubarak was forced
to resign on February 11, the Egyptian revolution has taken a back seat
within the global media to Libya and Japan. But the country has made
progress.

Voters approved amendments to the constitution that open
up the political process. A new president will be limited to two terms
in office, and limitations on who can run have been lifted.
Parliamentary elections are scheduled for September, and presidential
elections will follow. The interim military council that is currently
running the country does not seem to want to hold on to power longer
than necessary.

That is all well and good, but the hasty voting
schedule favors established parties like the Muslim Brotherhood and Mr.
Mubarak’s National Democratic Party. Those who drove the revolution are
still struggling to organize into political parties. With police
presence much reduced, crime rates are up. On top of all that, the
economy is suffering, in large part because the vital tourism industry
is way down. The finance minister more than halved the country’s
expected growth rate for the year to 2.5%.

Then there are the
foreign policy questions. Egypt says it will honor its international
treaties, including its key 1979 peace pact with Israel. That peace
treaty made Egypt the first Arab country to officially recognize Israel
and paved the way for the United States to begin economic, military and
political relations with the Arab giant. It is one of the most important
peace treaties within the Middle East and has long cast Egypt as a
mediator between Palestinians and Israelis. And yet Cairo also announced
it will resume diplomatic ties with Iran after a break of more than 30
years, which begs the question of whether a link to Iran will hurt
Egypt’s mediating abilities.

Then there is Syria. Overlooked and
underestimated in importance, Syria has been struggling through its own
political uprising for three weeks. The mere presence of protesters in
that country is a feat, as Syria is the Arab world’s most ruthless
dictatorship. And the implications of a Syrian regime change would be
significant.

Syria’s principle allies are Iran and the Lebanese
Shiite militia Hezbollah; together the three stand against Israeli and
American aspirations in the region, working to destabilize Lebanon and
promote the Hamas rule in Gaza. In recent years Syria-Turkey relations
have flourished, and Damascus has become the cornerstone of Ankara’s
ambitious Arab policy. And if post-Mubarak Egypt stops blindly
supporting Israel, Syrian-Egyptian tensions could rise. In general, if
Syria were to fall into disarray, it would leave a regional power vacuum
that could turn the ever-precarious Middle East on its head. 

The
country’s president, Bashar al-Assad, follows in the footsteps of a
father whose 30-year rule included a brutal repression that is regularly
described as the “single deadliest act by any Arab government against
its own people in the modern Middle East.”

In 1982, Hafez al-Assad
instructed his army to crush an opposition movement led by the Sunni
Muslim community that was centered in the city of Hama. Under a
scorched-earth policy, government troops leveled parts of the city with
artillery fire and indiscriminately killed 10,000 to 25,000 people (the
highest estimates reach 80,000); the vast majority of casualties were
civilians.

Since the 1982 Hama massacre, dissidence has been very
muted in Syria. Hafez died in 2000, and the presidency passed to his
son. Bashar promised reform but has actually changed little, continuing
his father’s zero-tolerance policy for opposition, maintaining tight
control over freedom of speech and the Internet, and keeping a tight
alliance with Iran.

If you need any further proof that Bashar is
unwilling to relinquish control, look no further than Syria’s 48-year
state of emergency. Implemented in 1963, after the Ba’ath Party took
over power in a coup, the law effectively suspends constitutional
protection for citizens, enabling the government to make preventative
arrests and hold suspects without charges while denying detainees the
right to file court complaints or have lawyers present during
interrogations. The Assads have used the threat of war with Israel as an
excuse for keeping the law in place for almost 50 years.

The U.S.
State Department’s 2009 report on Syria documented numerous serious
human rights abuses in the country, including arbitrary or unlawful
killings, enforced disappearances and the vanishing of an estimated
17,000 people. Syrian prisons employ torture methods ranging from
electric shocks to sexual assault, to beating on the soles of the feet.

Yet
in the face of this kind of dictatorship, this kind of brutal
authoritarian rule, Syrians are starting to rebel. In three weeks of
protests, demonstrators have been calling for basic freedoms through
political and economic reform, plus the release of all political
prisoners and an end to emergency law.

President Assad has
responded with a heavy hand. Government security forces have killed more
than 100 people, many shot by rooftop snipers during peaceful protests.
Protesters say their members are regularly arrested and beaten, often
to death. To make matters worse, Assad blamed Israeli provocateurs,
rebel forces and foreign agents for the bloodshed – anyone but his own
forces.

Syria is another country where a family from a minority
group rules over a majority of different religious affiliations. The
Assad family is Alawite, a branch of Shiite Islam that represents just
11% of Syria’s population. The rest of the 22 million in the country are
overwhelmingly Sunni Muslim. On top of that strife, the Assad family
has long denied citizenship to the country’s 1.5-million-strong Kurdish
minority, leaving Syrian Kurds unable to find work or enroll in school.

Keenly
aware of his country’s sectarian divisions, Assad has packed the Syrian
army ranks with loyal members of the Alawite minority. This means that
unlike the armies in Tunisia and Egypt, who generally refused to
confront non-violent protesters and in doing so spelt the demise of
their autocratic rulers, many senior Syrian military officers know their
fates are tied to Assad. As such, the military has great loyalty to the
president.

Assad’s response to date has been an iron fist in a
velvet glove. He has spoken abstractly of reform but offered little in
concrete terms. He has told his people to be patient; that there is no
need to demand reform because he is working tirelessly to provide it.
Meanwhile, his troops continue to kill protesters in the streets. It’s a
frail balance for the country, and one that will not last.

Syria
is a key player in Iran, Iraq, Turkey, Lebanon, Palestine and Israel.
Its internal problems now threaten to reshuffle the cards, adding to the
general sense of insecurity and latent violence in the region. In
addition, Syria’s internal stresses exemplify one of the biggest threats
in the Middle East: sectarianism.

Several Middle Eastern states
were built on a mosaic of old religions, sects and ethnic groups held
together uneasily by central governments, many of which capitalize on
the divisions to maintain power. Open conflict between Sunnis and
Alawites in Syria could catalyze other countries into sectarian strife,
adding a major new dimension to the region’s instability.

In
short, there are a lot of scenarios that might play out in the Middle
East but few, if any, of them involve stability. So if oil traders and
analysts are focused on worst-case scenarios, they are really just doing
their jobs.

Nevertheless, further major developments in the
region will not likely happen overnight. The loss of Libya’s output has
already been priced into the market, so, with no immediate threat to
other Middle Eastern or North African supplies, traders are becoming
hesitant to chase prices higher within the current rally. In the longer
term, however, most oil market movers and shakers expect instability to
reawaken and send prices back up.

Reuters surveyed 32 major oil
traders, bank analysts and hedge fund managers in the first week of
April, launching the poll after Brent oil gained $8 in five days to
surpass $120 per barrel. Two-thirds of those surveyed expect the current
rally to fizzle out fairly soon but think oil will roar back above $130
per barrel in the second half of the year. One in five expect oil to
hit $150 per barrel by the end of the year.

We all like to gripe
about greedy traders pushing up the price of oil. But at present, the
most important oil-producing region in the world is grappling with
fundamental changes, the results of which are almost impossible to
predict. Uncertainty makes commodities more expensive. And for at least
the rest of the year, uncertainty is the most reliable aspect of oil.

 

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Thu, 04/14/2011 - 21:46 | 1171047 tawdzilla
tawdzilla's picture

We're entering the right side of the peak oil bell curve.  The era of cheap oil is over.

Thu, 04/14/2011 - 22:55 | 1171245 samsara
samsara's picture

A really cute 2:00 video of The Peak Oil Curve and what it means.

http://vimeo.com/15477088

Thu, 04/14/2011 - 21:52 | 1171063 JW n FL
JW n FL's picture

$125 Dec. ???

who wanted to deliver?? i forgot your dumb fucking name?

Thu, 04/14/2011 - 21:59 | 1171076 mayhem_korner
mayhem_korner's picture

We all like to gripe about greedy traders pushing up the price of oil. But at present, the most important oil-producing region in the world is grappling with fundamental changes, the results of which are almost impossible to predict. Uncertainty makes commodities more expensive.

Highly un-insightful.  Three rationales given - traders, fundamentals, and generalized uncertainty - but no commitment to any of them as a dominant gene.  My analysis (right or wrong, but fodder nonetheless):

Key underlying is that crude supply-demand complex is comparatively less variable than dollar supply-demand at present.  Fiat debasement is giving the commodity its direction.  Next, scarcity premiums are ascribed any time unrest in the ME reaches prime-time.  Unrest is always there, but it gets a market response when English-speaking westerners are getting camera time  in the midst of large gatherings of torch-bearing locals.  Traders don't push the market so much as give it temporal fuel as they play the "bigger-fool" game.

The compounding issue in this case is that the dollar debasement is also partly behind the civil unrest via food shortages in MENA.  We see the cancer at the gas pump, but it's much more real in the lives of those at ground zero.

Thu, 04/14/2011 - 22:32 | 1171187 Holodomor2012
Holodomor2012's picture

+1

All sqawk is coverup.  The plebs must never awaken to the fact that monolithic usury predetermines monetary failure.  Were the plebs to (re)learn such a thing it would severly cripple the ability of TPTB to impose yet a new usurous currency after the previous one is destroyed by parasitism. 

Thu, 04/14/2011 - 22:19 | 1171142 CrashisOptimistic
CrashisOptimistic's picture

Price determined by agreement between buyer and seller . . . Of The Oil.  Not a piece of paper.

The classic KSA statement: We will not produce more when we have no orders for more.  Well, if they quote $200/barrel, they likely won't get orders and presto, they have their excuse to not produce, camouflaging yet again their inability to do so.

Oil is the alpha asset.  It trumps all else.  Oil isn't measured in dollars.  Dollars are measured in oil.

Thu, 04/14/2011 - 22:34 | 1171191 mayhem_korner
mayhem_korner's picture

If a finite resource is the "alpha asset", everything else should depreciate relative to it, and you should never offer to sell it to anyone for anything.  Just debase everything else by withholding.

The problem is you need currency to effect exchange.  If you collapse all the currency, you think oil will stand as the alpha asset?   

Maybe cut back a bit on the poppy seeds a bit, dude.

Thu, 04/14/2011 - 22:42 | 1171208 Charles Mackay
Charles Mackay's picture

Sorry, the loss of 1.3 mbpd of high quality Libyan oil can no more be 'priced in' the market any more than than the price of food on a desserted island can be priced in if there was only enough food for 9 to survive on an island of 10 people. 

What is the 'price' to pay when there isn't enough oil to go around.  I don't know but anyone who says for certain they know the price to put on a shortage is, well, a bigger fool than I for responding to this article.

 

Thu, 04/14/2011 - 22:49 | 1171223 mayhem_korner
mayhem_korner's picture

Shoot 1 of the 10 - problem solved.  Econs call this "demand destruction."

Seriously, if you can't survive without a whole lot less oil then you might as well mail it in right now.  Ain't gonna be your biggest problem.

Thu, 04/14/2011 - 23:37 | 1171336 JosephConrad
JosephConrad's picture

The 2 U.S. trading borses are 'fixed, unregulated AND operate without a hint of integrity. Add to that the U.S. has sweetheart deals with all the Gulf states (we protect you & keep you folks in power & you give us sweetheart oil & gas pricing).

Then add to THAT the standard, ordinary White Racism, Arrogance, Greed & Self-aggrandizement

(RAGS) driving the U.S. & E.U. nations and you have regularly CHAOS in Resouces-Rich, Non-White nations and LOTS of DEAD MUSLIMS, Arabs and Africans! This adds up to SUPER HIGH Oil Prices Forever! GO NATO! 

 

Thu, 04/14/2011 - 23:36 | 1171339 That Peak Oil Guy
That Peak Oil Guy's picture

Oil; the meth of industrial civilization.

TPOG

Fri, 04/15/2011 - 02:41 | 1171571 ricksventures
ricksventures's picture

Oil; without it, you would be shitting in the woods, left without TP instead of reading and posting on ZeroHedge.....

 

The Meth is the idea of keeping the world overpopulated with too much cheap and donated medicine and food....The Meth is voting for enemies of the state that bow down to dick-tators instead of eliminating whatever stays in our way of getting the energy we need....The Meth is dumb taxpayers not knowing a thing about where their tax money go, not rebeling, not shooing, not protesting, just eating and sleeping, in that case its time for 20usd for a gallon to wake them fuck up, no food for you obese cow, no gas money, no truck driving , stay at home and starve, that gives you time to think about your past 100 years of sleeping....

 

BRING BRING the civil the world war, launch the A-bomb and either win and win for good or die you obese turd, let the dick-tators to sort out the world matters

Fri, 04/15/2011 - 07:13 | 1171699 westboundnup
westboundnup's picture

We'll sell no whine before it's time.

Fri, 04/15/2011 - 09:07 | 1171974 Urban Redneck
Urban Redneck's picture

... “There is little we can do in terms of price control,” said Mohammed bin Dhaen al-Hamli, the oil minister for the UAE. “The market should pay more attention to real supply rather than imagined shortages. International markets are choosing to ignore market fundamentals and bet on the worst-case scenarios.” ...

OPEC to English translation:  Price is irrelevant- we keep our jobs, or your imagined shortages will become very REAL.

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