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Arab Uprising and Oil: What to Expect as Crude Approaches Its Seasonal Uptrend


If the WTI oil trade is higher from here, as analysts expect, it's likely we'll see stocks follow for the time being.

Leading up to the events of this weekend, it's been all battle drums and posturing among the world's major oil producers and consumers. Over the past few days, West Texas crude has held a fear premium and traded comfortably around the important psychological level of $100, but investors are no longer looking at the oil market with one eye open. Iran has officially shut off shipments of crude to the UK and France in response to sanctions or threat of them. The tension in Syria is gaining attention, but the United States doesn't know if it wants Syrian President Assad out because of fears that the radicals opposing Assad's rule are Hezbollah supporters or some form of Al-Qaeda-sponsored extremists.

The world is changing as we speak. Look at Egypt; the country is now fractured into regional gang leaders. Meanwhile, the Arab Spring is turning into a pivotal point for Iran, which is quickly becoming the organized muscle in the region and has the infrastructure to manipulate countries looking for direction. All are up for grabs with central governments that are in disarray while regional and ethnic strongholds are the ones increasing control. That region is looking for a leader to challenge the West. If Iran gets an indication from Russia or China for a potential military relationship or arms deal in exchange for crude oil (China purchases roughly 20% of Iranian oil exports), we could see some interesting developments. Iran will try to seize and sponsor opportunity for these small, fractured governments. From Al Jazeera news: "Russia and China have prevented the possibility of outside military intervention with a UN mandate. Iran's leadership, which relies on Syria to promote its interests in the Arab world, is no longer just voicing its support, but taking concrete measures." The UN Security Council has been fractured since the invasion of Iraq, but with China and Russia both resisting more economic restraints on Iran; the cards are finally being shown and alliances are forming.

Let's analyze the WTI crude oil seasonality trend that dates back to 2006. If an investor had purchased the commodity during the third week in March in each of the six years, then sold half of the position in the final week of April and the remaining portion during the final week of May, the investor would have enjoyed a positive net return each year. The last time we witnessed crude oil at this elevated level prior to its seasonal upward trend was in 2008, when it was trading nearly $6 below the current spot price of $105. True to form, crude traded at $101.84 on March 21, 2008, and by April 25, 2008 it had touched $118.50. Crude reached $132 just prior to Memorial Day weekend on May 23, 2008. This series of events was widely regarded as a commodity "bubble" of sorts with the black currency ultimately peaking at $145 in early July 2008 on a closing basis.

Over the weekend, JPMorgan commodity analyst Larry Eagles upgraded his price target for WTI to $120 by the 2012 election, sighting geopolitical risks and asset reflation due to the abundance of stealth liquidity provided by global central banks. In the previous six months, gold traded north of $1,900 an ounce on fears of a US credit downgrade and debt contagion in Europe. What the yellow metal was really telling us was that rising inflation was within sight. I now believe the price of WTI crude oil, set in motion by geopolitical events, will come on strong and the fundamental reasons will be obvious in hindsight. Accommodative policy measures and the flow of easy money is leading to rising inflation. As China demonstrated over the weekend, the risk at the forefront is a slowing growth; demand has been hampered by the increase in rising consumption prices -- a situation that translates into a difficult path for policy makers. I believe WTI crude oil will reach the aforementioned $120 price target offered by JPMorgan but at a much faster clip. Commodity prices supersede equity prices. If the WTI oil trade is higher from here, it's likely we'll see stocks follow for the time being. The final impact shows a price break for both oil and stocks, as the latter becomes unsustainable from demand destruction which filters into equities.

Click to enlarge

These events will change as the geopolitical chess match develops. Saudi Arabia has separated itself over the last decade from the actual concerns of the Middle East. The nation has been seen as an extension of and landing strip for the US and Europe, and its policies have remained focused on money and the shipment of oil. Two Middle East wars have occurred with little concern beyond the affected borders. Other countries now see unrest in the region an opportunity to bring out Arab world unification, and Iran will fuel the cause.
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