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.

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

“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.

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

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

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. 

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

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.

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

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.

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

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.

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.

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.