Oil at USD 115 a barrel = War in the Middle East? – 17 April 2008

 

 

DOE crude oil inventories ticked down unexpectedly last night (see the red line on the Bloomberg chart) and this provided an excuse for oil to surge to a new high at USD115.21/b (white line). It remains a bit of a mystery why crude oil should be hanging up there when the US and other parts of the Anglo-Saxon world appear to be in recession. There do not appear to be any major supply-side issues. Certainly, the crude has been boosted by general dollar weakness. But this cannot explain everything; even in Euro terms, oil is at a record price.

 

Various commentators have cited the ‘China story’ to explain the phenomenon. China demand has certainly been resilient (witness the 10.6% GDP figure yesterday). Massive oil subsidies in China and other Asian countries disguise the true price of the commodity and serve to encourage demand. But with China GDP growth off its highs, and controls on industry about to be implemented in the run up to the Olympics, shouldn’t one expect the price of oil to start softening?

 

In a recent piece, Stratfor (a private intelligence agency based in Texas) suggests that such a high oil price is factoring in potentially significant geopolitical risk. The first point they highlight is that in September 2007, the Israelis bombed a unspecified target in Syria; the rumour-mill has be working overtime ever since, and there have been suggestions that the target was a nuclear reactor provided by the North Koreans or maybe even the missing Iraqi WMD. Whatever it was, both sides have been unclear about exactly what was hit. Secondly, the US started purchasing oil for its Strategic Petroleum Reserve in February 2008. This was a strange decision to make, given the impending economic slowdown and the record oil prices at the time – did the US Department of Energy expect some sort of oil supply disruption? Stratfor also noted some other interesting developments: a senior Hezbollah leader was assassinated in February, but Hezbollah did not retaliate; the US Sixth Fleet moved some ships near to the Lebanese coast in March; and Israel has recently conducted a massive military exercise which involved mobilizing reserves and causing significant disruption.

 

And in the background, there have apparently been the inevitable rumours swirling round the Middle East that some sort of war is imminent. Such rumblings are not unusual, but might not these factors, taken together, explain why oil costs USD115/b? Given such implied geopolitical risk, would you want to go short?

 

A sustained oil price of USD100/b or more will compound the severity of a US recession. But if war really were to break out, oil at USD150/b would not be unimaginable. Now that would be really messy…

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