Middle East Unrest & Stockmarkets

20th Feb '11 by Isaac

13 comments 6839 reads

IMO I think the markets are mistakingly overlooking the unrests in the Middle East. I think this could escalate into something very nasty impacting the wider world.

It all started off in Tunisia

"The demonstrations were precipitated by high unemployment, food inflation, corruption,[5] a lack of freedom of speech and other political freedom[6] and poor living conditions. The protests constituted the most dramatic wave of social and political unrest in Tunisia in three decades[7][8] and have resulted in scores of deaths and injuries, most of which were the result of action by police and security forces against demonstrators"

http://en.wikipedia.org/wiki/2010%E2%80%932011_Tunisian_revolution

I think when taking into account that the world is likely to have a Oil supply shock in the coming years all you need is one of these Arab Oil exporting countries to have a problem exporting Oil. Then the likes of Saudi who claim to have spare capacity are put under pressure especially when Wikileaks claimed the US was concerned about Saudi Oil reserves & its ability to pump more Oil etc.

I think if these protests breakout in Saudi or Iran to the extent we saw in Egypt then it will have much wider implications and there will be every chance of a 1970s style rise in Oil prices. This could then escalate into protests in the western world as the cost of living goes to unbearable levels due to high Oil prices.

Afterall these protests were precipitated by high unemployment, food inflation, corruption,[5] a lack of freedom of speech and other political freedom[6] and poor living conditions. The bold is already present in the UK and US for quite a few people [maybe not so much the poort living conditions] and I think there is only so much more the public can take!

If we did'nt have QE from the US/UK perhaps we would'nt have these high levels of inflation as afterall we were very much on the road to deflation back in 2008.

I still maintain the view that markets will peak out in 2011, towards the end of 2010 I said I was expecting a decent 1H and that is what we have had so far. I'm not so sure it will be so decent after May/June though.

For the markets to drop significantly some major event has to occur and that may well be the unrest in the middle…

Unlock with Email

Unlock with Google

Already have an account?
Login here

About the Author

Isaac

Premium Member

13 comments

emptyend

20th Feb '11

For the markets to drop significantly some major event has to occur and that may well be the unrest in the middle east. The markets were always going to be propped up by the Fed & that is the main reason this bull market has lasted so long.

I can't disagree with that view.

When fresh air stops getting pumped into stocks via monetary policy, the deflation of the bubble may be quite sharp.

As ever, the question is what the catalyst will be - and the market seems not to care much (so far) about the issues in the Eurozone or in the Middle East.......but IMO that insouciance cannot persist for ever!!!

marben100

20th Feb '11

Hi Isaac and ee,

You may be surprised that I also broadly agree with the view you present. My available cash now stands at 11.6% of my overall portfolio, with a further 16.3% in fixed interest instruments (above target levels of 9% and 15% respectively). I expect I will be revising my target cash level upwards significantly, as we near the end of the UK fiscal year. ;0) I am taking a bit of a chance here, that there won't be a major shock in the next month or two, simply based on the history that the early part of the yearr rarely marks the start of a bear market. That will mean (selectively) shrinking my fixed interest as well as equity exposure. IMO both are vulnerable to shocks. I do not expect to reduce my exposure to natual resource stocks where significant newsflow is expected, nor to gold mining. Gold is likely to remain strong in the face of political and monetary upheaval.

There is another quarter where a shock (at least to western markets) may come from, and that is Eurozone instability. That fear seems to have gone onto the back-burner, with the current middle-eastern tumult. I have just found an interesting piece on Spanish debt: http://www.ft.com/cms/s/0/ef32a6e8-3ac8-11e0-9c1a-00144feabdc0.html . What I note from that article is that fears seem to have subsided recently, purely on sentiment. There is little, if any, fundamental improvement to Spain's situation, except that the economy shrank less quickly than expected last year!

Regards,

Mark

PS I hope we might get some comment from ManSiarad, as our "man on the spot" in the gulf.

haiderali

20th Feb '11

I think it is interesting that most protestors in most countries are doing so for bread and butter issues, although our media wishes to emphasise the freedom/democracy angle. I think the latter is important, but only because the protestors don't want to be fobbed off once they've gone home.

Noteworthy that one immediate response of most governments is to offer more subsidies for staple foods.

So perhaps increasing international prices for commodities as other governments around the world take note? Perhaps also benefits for western banks due to capital flight from these countries and also boosts for high end property?

FWIW I don't think there'll be significant change in the major oil producers. I think Iran is different to the other countries simply because the proletariat tend to be better looked after. And I think the Saudis have the security situation better under control, with the Americans being more willing to turn a blind eye.

OTOH if a case can be made that there is no "partner for peace", there could be more scope for military action elsewhere.

Isaac

21st Feb '11

Gerald Celente says Europe is next for protests.

It has happened in Arab nations first because they simply can't eat as food prices are so high. Guess what Commodity prices are valued in $ and the depriciation of the $ has caused Inflation. The lower the $ the more $ you need to buy things, but the average egyptian only earns $10 a day!

Gerald is a good forecaster of social trends, he has a good track record.

Worth listening to his 3 min video : http://www.youtube.com/watch?v=HHrc8Xji7Ao

http://www.youtube.com/watch?v=GMeppAxG3pA

Ben Bernanke & Mervin King are more responsible then they realise for the current mess! They need to raise rates and wipe out the inflation. The reckless who took debt needs to face the consequences, they should never have been bailed out.

Isaac

21st Feb '11

In the tough-talking, finger-wagging speech, Kadhafi's son blamed foreign media of inflating the death toll but warned that any uprising would be ruthlessly suppressed.

"Libya is not Egypt, it is not Tunisia. There are no political parties in Libya," he said.

"We will take up arms... we will fight to the last bullet," he said. "We will destroy seditious elements.

"If everybody is armed, it is civil war, we will kill each other."

http://uk.news.yahoo.com/18/20110220/tpl-libyan-uprising-a-foreign-plot-kadha-b04fc5e.html

Pretty scary reading.

FTSE futs down 23.5 points, thay have been progressively falling the last two hours. April Oil futs WTI up 170 points at 91.53, Bent at 103.61 up 99 points so far

emptyend

21st Feb '11

Pretty scary reading.

I actually watched it live last night......and for the second time in 10 days (the previous time being Mubarrak's "last stand") found myself having to pick my jaw up off the floor at a speech from a Middle East leader.

He did make one good and relevant point though - there are lots of tribes in Libya and one possible outcome is the fragmentation of the country into smaller states. That may not be great for the maintenance of oil and gas production...which may be material, given that Libya produces nearly 2mn bopd of oil - and a chunk of the gas that goes into the Italian gas supply network.

ManSiarad

21st Feb '11

In reply to Marben100 #2

PS I hope we might get some comment from ManSiarad, as our "man on the spot" in the gulf.

Well, since you ask...

Warning - long post

Let me first try to come at the broader issue of the current unrest in the Arab world from a political / stability perspective. As some posters know, my 'day job' involves, in part, keeping an eye on such things. Then I'll turn to some of the possible implications with regards to companies and O & G investment.

The situation is evolving so rapidly, that it's difficult to keep up - but then I am not the only one facing that problem. Obama, though better informed than I am, appears to have a similar problem!

It's important to note first, I think, that although there are superficial similarities to the protests throughout the region, they are not all fed by the same underlying issues and they're dealing with a pretty diverse collection of Governments, each of which is likely (or was likely) to respond in different ways.

Common factors include the following: Governments in power for a long time - e.g. Qaddafi since 1969, Ali Abdullah Saleh in Yemen for over 30 years, Husni Mubarak since Sadat's death in 1981 (but the military dominated governments since 1952). The Bahraini Prime Minister since 1971. Populations where the majority (in some cases an overwhelming majority) are young, under 30, and, therefore, often largely divorced from those in power. Often high levels of unemployment. Corruption. A failure of the regimes to open up a meaningful way for public participation in Government (although this is not quite the case with Bahrain). A state security / police structure that is (or was, in the cases of Egypt and Tunisia) perceived as being repressive - often rightly so. Often overt electoral fraud or a perception thereof, where elections took place, e.g., most recently, late last year, in Egypt and, to a lesser, extent, Bahrain.

Families and inheritance.

There was enormous dissatisfaction at the way in which Presidents have sought to groom their children to take over - Egypt, Yemen, Libya and the beginning of it in Tunisia. And in Syria too, where Bashar Al Assad succeeded his father several years ago. Combine that with extensive corruption, and there's a real fury about the attempt to create hereditary Presidencies - although I think that the chances of that working anywhere are now gone. The 'proper' monarchies are different, and do have a genuine basis of support.

Diffferences?

Well, the roles of the armed forces vary. The Tunisian army is small, and had never been involved in politics. The Egyptian army had benefited hugely from the regime, in terms of access to business opportunities (and opportunities for corruption) but, at the same time, was / is perceived by most Egyptians as being a national, patriotic institution, rather than just propping up the unpopular regime. They are also the only one of the armies in the region (apart from Syria) to have been involved in external wars - against Israel, although not since the 1973 conflict with Israel. The Libyan armed forces, along with other institutions of state power (police, organised supporters of Qaddafi) are tightly controlled by Qaddafi and his sons. The Yemeni armed forces have been fighting savage anti-government insurgencies. The Bahraini armed forces, although formally under the control of the Crown Prince, had previously deferred to the powerful Prime Minister, who has been in power since 1971, and who had more control over events, at least until last week, than the Crown Prince and, possibly, the King.

Other organs of state power? The role of police and pro-government thugs/militias varies. Some have been more repressive than others. It was no surprise to the Tunisians or the Egyptians or Libyans that they started killing people. In Bahrain, though, despite the relatively low level of repression that existed before, most Bahrainis were utterly shocked and amazed when the police (and the army) shot at protesters - and that shock has actually led to the decision,announced by the Crown Prince, to step back and talk about dialogue, even if some of the protesters (unlike the political parties) don't want to accept that but are demanding a complete change i nthe structure of government.

Individual characteristics.

Well, in Yemen, virtually everyone is armed (it amazes me that there's been so little bloodshed so far). The role of the tribes - some for and some against the Government - is enormous. There is a widespread desire for secession in the South (or, rather, for a bringing to an end of the unity between South and North that was agreed less than twenty years ago, and was then kept going only as a result of a successful war by the North against the South).

In Bahrain, as has been widely noted, the majority of the population, around 70 per cent, are Shia, with 30 per cent Sunni, yet the Sunni, led by the ruling Al Khalifa, have completely dominated government. Expenditure on development has primarily benefited Sunni areas.

Libya: the east (Benghazi) has always been restive under the regime of Qaddafi - and, once again, the financial and other benefits of the spending of the oil money has primarily been seen in the west (Tripoli). The tribes are relevant too, although often overlooked (and their leaders have been largely co-opted by Government until now)

Islamist issues: Of varying importance, although it's worth noting that all of the regimes that have faced / are facing problems, have played the card in the past of warning that, if they go, Islamists / fundamentalists will take over, and have derived support from various Western governments as a result.

Thus in Algeria - another one to watch - a very brutal fundamentalist insurgency was only defeated (brutally) after many thousands (100,000 + ?) had been killed. In Egypt, the Moslem Brotherhood have openly rejected terror as a strategy (although it was a breakaway from them that killed Sadat). And Egypt has a significant Christian minority, of course, unlike any other of the other states in the region apart from Lebanon (a special case) and, to a smaller extent, in Syria and Jordan, though there they have no political importance. In Yemen, although there are fundamentalist elements (Al Qaeda in the Arabian Peninsula, AQAP), the real religious divide is that between the Sunni- dominated government and the Shia tribes, like the Houthis. In Bahrain, despite Iranian meddling, most Bahraini Shia are, above all, Bahrainis, not inspired by the Iranian/Shia version of fundamentalism. (Bahrain has a long history of stressful relations between its Sunni and Shia inhabitants, anyway)

Everywhere the protests have broken out, the Islamist groups, where they exist, like the Muslim Brotherhood, have been scrambling to keep up. Their views are certainly not representative of all, or even a majority, of the protesters, even though, where they have a well-organised structure, they may be able to incease their influence at the expense of the loosely-organised, more liberal, young protesters. Something to watch in Egypt and Tunisia.

Plenty of other individual characteristics - too many to review in detail, although I will mention one more - the way in which Qaddafi has, apparently, used foreign mercenaries, from Chad (and Niger?) and the Bahraini police and armed forces include a lot of non-Bahrainis, including non-Arabs, who have been recruited, and given citizenship, to form the strong arm of the state. There's no sign, as far as I am aware, of foreigners being brought in by Governments in other countries.

So one should never make the mistake of thinking that there's some kind of general wave of unrest throughout the Arab world, based upon similarities throughout the region. Yes - factors relating to the frustrations of unemployed youth, rising prices and the increasing reach of social media like Facebook and Twitter are common to all, to a greater or lesser extent, as, indeed, is a copycat effect, but basic elements of the unrest, and the response of the Governments to it, have varied from country to country - and, in consequence, so has the degree of success achieved by the protests.

In Tunisia, the army, having been divorced from politics, stepped in to order Ben Ali out, but currently show little sign of wanting to run the new Government. In Egypt, it's different - the army, (in particular the upper echelons) I suspect, will do all that it can to preserve its own privileges - though it would appear to recognise that there has to be a major re-structuring of government, through fair(er) elections and a new constitution to permit both the long-established political parties and new movements to participate in such a way that they feel they will have a real role to play in future governance. That's why the army told Mubarak he had to go (but has made strenuous efforts to preserve some of his dignity by allowing him to stay in the country). In Libya, the army appears to be fully behind Qaddafi - hence the descent towards something resembling civil war. In Bahrain, once the Crown Prince exerted his control over the army, they stepped back to allow an opportunity for dialogue (which can only, in my view, have any chance of success if the Prime Minister is forced to retire). In Yemen, the tribes (apart from air-power) are probably as well armed as the armed forces, unlike anywhere else in the region. The army won't want to take them on.

In Bahrain, there is a large section of the population (most of the Sunni) who genuinely support the Government. The same is true in Yemen (though for different reasons). In Tunisia, support for the Ben Ali regime came from those who had directly benefited, in particular those working for the state or those being able to make use of the opportunities for a corrupt liberalisation of the economy - as was the case in Egypt. All very different.

The nature of the Government response has varied hugely too. A relatively low-level use of direct repression in Tunisia and Egypt, and then the army forced regime change. Likewise, after the initial phase in Bahrain (and the shock at that was felt throughout the Gulf), the ruling family, in pursuit of the protection of its legitimacy, appears to have effectively split, with a more liberal group, led by the Crown Prince with his father's support, taking control from the older, more conservative, more repressive elements. Libya/Qaddafi have opted for straight, brutal repression - not much scope there, in my view, for any kind of compromise emerging. In Yemen, perhaps the Government recognises that massive repression might not be very effective against a well-armed population which it has never fully controlled in any case. (Yemen is,by the way, my top choice for the next 'failed state').

Another difference is the nature of the relationships between individual countries and the West, in particular the United States. Where regimes and their armies have close ties with the US, (of huge importance for armies who derive most of the equipment from the US), there will be heavy pressure on the governments themselves - or the armed forces - NOT to opt for widescale, brutal repression - e.g. Tunisia, Egypt, Bahrain, and, to some extent, Yemen. (And, looking wider, for areas of potential future instability, Saudi Arabia and Jordan, the latter having been relatively quiet so far). Where no such relationship exists, there is no external restraint on the regime - e.g. Libya (and, I fear, Syria, if anything happens there). They can then go down the route of full scale repression - pretty easy in countries which are not very open anyway, in terms of international media presence or access. (In Djibouti, to mention it for the only time, I gather that there isn't a single foreign journalist, although the preence of the important US base may act as a restraining factor).

On the political side, let me turn finally, and specifically, to the Gulf. There is a genuine concern, and belief, among the other Gulf states that the Iranians are fomenting the problems in Bahrain. True, at least to some extent. I personally feel that concern is a little over-stated (although I don't have access to the information on which that concern is based). That then feeds on the general concern that is felt about Iranian objectives, whether pursued directly or indirectly. Thus, for example, - as reported recently by Wikileaks, - the King of Bahrain told the US Ambassador a year or two ago that he believed that Hizbollah in Lebanon were providing 'training' for Bahraini Shia dissidents and that Iranian ally Syria was helping by providing false passports and facilitating travel.

The Saudis are really worried about their Shia community - mostly in the eastern province, opposite Bahrain, where most of the oilfields lie. So too are the Kuwaitis, where the Shia population is, I believe, around 30 per cent. In each country, there has been previous evidence of Iranian meddling, so it's easy to understand why the Governments are concerned.

I could go on and on - but will move away from the politics now. As I noted, much of the above might be overtaken by developing events, anyway.

Let me just try to look at the relevance of all of the above for investment - in particular in terms of O & G. All IMO, of course.

First, it's worth noting that none of the protests have been aimed at foreign companies, O & G or otherwise. I gather, for example, from a large British company, for example, that while some family members were evacuated from Egypt, operations were not affected, and people are now returning. As of yesterday, there had been no impact on their Libyan operations, either. This might not necessarily be the case in areas of general instability, like Yemen, of course - but that's nothing new.

There's no hostility to the companies operating, or to the O & G industry as a whole. Indeed, I suspect that in most cases, workers in the O & G industry, being better paid, better educated and more exposed to the outside world, may well be among those who welcome the changes that are happening, and could be quite extensively involved in them.

The one concern I would have would relate to any company - and this may apply more to the smaller ones - that has only been able to get into a country and to operate there because of very close links to the families in power. If those families fall - Tunisia, for example - and there is a hunt for their assets and an investigation of their past dealings, then companies which have succeeded in gaining access only through the spreading around of brown envelopes might well be in for a difficult time.

But a wave of nationalisations? No, I don't think so.

More generally, I suspect that as things begin to settle down, there will be increasing expenditure by Governments, whether new ones or ones which remain unchanged, on internal economic and social development, to address some of the fundamental issues of unemployment, improvement of the infrastructure and so on. That will require heavy investment - and the O & G industry is a pretty good source for the money that will be required. It would be wise, then, not to kill the golden goose, or to limit its ability to carry on laying eggs.

Such internal investment, though, might mean a scaling back of major investment plans overseas, particularly with regards to building an industrial or property portfolio, though I would expect sovereign wealth funds to continue trying to pick up good O & G investments abroad. We'll see.

To close, a couple of predictions.

1.Iran: heavy repression, which will probably be successful, for the time being (May God help the poor Iranian people!)

2. Israel: extreme nervousness, but no war, at least with Egypt, Syria and Jordan (though I don't want to predict what Hizbollah might do next). It's been noteworthy that the Israel/Palestine issue appears to have received virtually no attention from the protesters - they have local issues at home in the forefront of their minds.

Apologies for the long post. I hope it's of some interest.

Man Siarad

emptyend

21st Feb '11

Fab post - many thanks!! :-)

Fangorn

21st Feb '11

Superb post, a very enlightening read. Thanks alot.

ManSiarad

21st Feb '11

Well, I said things were evolving !

http://www.guardian.co.uk/world/blog/2011/feb/21/arab-and-middle-east-protests-middleeast

10.49am – Libya: BP has confirmed it is withdrawing employees from Libya and suspended preparations for exploratory drilling for oil and gas.

"We'll be bringing some families and some dependents out of Libya and some non-essential staff," a spokesman said, adding that the company would bring staff home over the next two days.

BP does not produce any oil or gas in Libya but had been preparing an onshore rig to start drilling in the west of the country.

The spokesman said BP employs around 140 people in Libya, but only "around 40" of those were British. The spokesman could not confirm how many of the 40 would be brought back to the UK.

Most of the staff in the country are engaged in exploration work, mapping underground rock formations in a bid to identify suitable drilling sites.

marben100

21st Feb '11

Absolutely superb post, Man Siarad. One of the best and most informative I've ever read. A "rec" is not enough.

Many Thanks,

Mark

ManSiarad

21st Feb '11

And again, before I close down today - this isn't a live tweet service, after all!

http://www.bbc.co.uk/news/world-middle-east-12307698

1328: Italian energy giant ENI, the biggest foreign oil producer in Libya, has announced it is evacuating all non-essential staff from the country, AFP reports. 1325: Libya's Quryna newspaper is reporting that anti-government protests have broken out in the town of Ras Lanuf - the site of a major oil refinery 1128: A number of European oil companies - Norway's Statoil, Austria's OMV and Royal Dutch Shell - have moved some staff following the violence in Libya, Reuters reports. Production at the Murzaq oil field run by Spain's Repsol has been unaffected so far, as has output from Eni's operations.

1055: Oil is at the heart of the Libyan economy: The oil sector contributes about 95% of export earnings and 60% of public sector wages. In 2009, the country produced 1.65m barrels per day, some 2% of total world oil production and has 3.3% of proven world oil reserves.

1049: More on the scale of BP's operation in Libya: It is based in two areas - deep-water drilling surveys in the Mediterranean Sea which is unaffected, and drilling preparation in the Western desert where contracting staff have been pulled out, forcing the company to halt drilling.

The longer the unrest/revolt/revolution (take your pick) continues,of course, the more likely it is that there will be some serious disruption to the Libyan oil industry. It's happening in Libya, whereas it didn't in Egypt and Tunisia, IMO, because of the great brutality of the government response.

Interesting to see that protests have broken out in Ras Lanuf - as I noted earlier, oil industry people, better paid, better educated, more exposed to the rest of the world, are likely to support regime change - and perhaps actively to engage in trying to get it.

There are reports Qaddafi has left Tripoli - though suggested destinations vary - Sirt, his home town, Sebha, his desert retreat, or Venezuela ! If that's true, things may evolve more quickly now.

So, as a rider to my earlier post, WHERE there is major government-led violence, it's probable that there will be some disruption to O & G operations, in a way that didn't happen in Egypt and Tunisia. That will affect the markets (Brent up today, I see), but shouldn't be taken, IMO, as an indication of any underlying hostility to the involvement of foreign companies in the industry in the Arab world.

To take a cautious approach with regards to investment? Well, it might be a good idea to Identify companies operating in countries where the governments are most likely to try, very hard, to hang on in the face of any protests that might erupt and then, as a minimum, consider reducing exposure. Countries? Syria. Kurdistan (where there have already been problems), Yemen. Algeria?

And watch out for nervousness in the market affecting companies with operations in other countries in the region. I'm amazed that Circle Oil COP hasn't suffered more but there are others too, like PCI .

As and when things begin to settle down - and that will take time, and will vary from country to country -there are likely to be opportunities to buy back cheaper.

Not that anyone should ever take my suggestions on an investment strategy seriously, of course !

Man Siarad

Marvo38

21st Feb '11

V helpful two posts - many thanks Mansiarad.

M

Middle East Unrest & Stockmarkets

Unlock the rest of this article with a 14 day trial

About the Author

Isaac

13 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...