Oil as a major risk to global growth

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Recent times have identified oil as a major risk to global growth if Middle East events were to get out of hand, pushing oil prices substantially higher and eroding real consumer incomes, a replay of 2011 (when prices rose $30 during the Arab Spring and Libyan Interlude) but only much bigger (fears of $30 to $100 spikes).

Seeing that the global oil demand/supply balance is in any case very tight today, the slightest disturbances can intensify the upside drift in oil prices.

It is not, however, as if risk only favours higher oil prices. For counteractions are underway aimed at easing the global demand/supply balance, hopefully allowing oil prices to drift lower and taking pressure off global consumers everywhere.

The focus is on Iran and the US, with politics apparently central to what is underway.

Europe and the US are steadily intensifying their isolation of Iran, aiming her to change the nature of her nuclear ambitions. To this end pressure is being exerted through trade sanctions, using the global banking system to gain leverage over Iranian oil trading.

As Iranian oil exports fall off and rumours of war intensify, however, it tends to worsen the global demand/supply balance, putting upward pressure on oil prices. Not only does this compensate Iran for lost export volumes, but it puts up petrol prices around the world, which especially in the US is inconveniencing President Obama in his re-election attempt.

The idea of trade sanctions is that Iran changes tack, reducing the risk of unilateral actions in the region while President Obama would like an improving US economy to improve his chances of re-election.

To this end a number of machinations appear to have been set in motion to ensure exactly those outcomes.

It isn’t publicly known what exactly transpired between the US and Israel during recent high level talks, but the gist appears to be to give sanctions and diplomacy a chance, with absolutely nothing allowed to jeopardise the Obama re-election effort during the critical months leading up to November.

Having presumably neutralised the critical warlike angle, it was time to neutralise the economic fallout from Iranian sanctions.

To this end both the UK and Persian Gulf oil producers appear to have been pressed into service, with the aim of influencing oil market realities and perceptions during the critical months leading up to November.

The UK turned out to be game to perhaps in conjunction with the US release some strategic oil reserves during the coming summer.

Though the IEA doesn’t now see the need for such action, and prefers to keep these global strategic stocks for genuine emergencies, one can see without trying too hard that petrol topping $4 per gallon in the run up to the November US Presidential election does constitute an emergency of some sort, at least to Mr Obama.

What’s in it for Mr Cameron isn’t quite clear, aside of the limitless gratitude of a two-term Mr Obama, which presumably could come in handy as a strategic reserve in its own right some time, at least to the UK.

Anyway, the two gents appeared in agreement last week about perhaps releasing strategic oil reserves over the summer and already telling the world now, so that the oil market can presumably incorporate this in its calculations of demand and supply (“down, boys, down!!”).

But it hasn’t stopped there. All of a sudden Saudi has become proactive on the grand scale, working overtime to get old oilfields back on stream to boost its potential production (and global reserve buffer) while overnight chartering 11 supper tankers capable of moving some 22 million barrels of crude out of harms way and nearer global customers in the West and East by about midyear and all this exciting information also already now being offered to watching markets.

But apparently it doesn’t stop even there. For there is a Gulf Co-operating Council where all the great and good in the Persian Gulf Game are represented. Most of them are apparently also considering upping their game, further boosting the apparent oil supply flows this year and increasing the global oil buffer.

Is this the Arab contribution to ensure Iranian sanctions will be successful without penalising Mr Obama?

In other words, it is in the region’s long term interest to get Iran to change its way short of a possibly disastrous war going wrong, and to this end oil prices need not be so high as where they are today ($125), with $100 a much more attractive proposition, fine for the major producers in terms of their fiscal needs, productive viz-a-viz Iran and assisting in getting US petrol prices closer to $3 rather $4 per gallon (and taking the heat off the US economy and Mr Obama)?

It all looks a very concerted effort to get oil prices to behave in a prescribed manner these next seven months, which just happens to coincide with a slight dip in Chinese growth, and this also making it easier to shape oil price expectations?

It just might all be coincidence, but there seems to be a Great Game underway which, even if it doesn’t quite succeed in convincing Iran to change direction, at least these next seven months keeps war at bay, the nose tightening around Iran and US petrol prices subsiding rather than ratcheting up, thereby also giving US growth and Mr Obama a chance in 2012.

And if all this doesn’t work to do the magic on Iran in pre-November 2012, one shudders to think what wink-wink transpired about Xmas or 2013.

Anyway, instead of being on our way to $130-$180 shortly, is oil actually going to ease off for a couple of months nearer $100-$110, a copycat slide of what transpired in 2011 once the 1Q2011 heat went out of the Arab Spring?

If oil drops 10%-20% these next few months, do allow that global inflation will be even less threatening and growth turning out to have upside potential, certainly in the West, but also the East.

It might boost global financial markets yet more as risk on continues to intensify.

That would presumably be friendly for the Rand in terms of incoming capital flows.

Falling oil price and firmer Rand would reverse some of the terrible petrol price increases of recent months. Not only Mr Obama would benefit, but Mr Zuma could also, come December, though all this has hardly been engineered for his benefit, or ours, of course, for we don’t figure on anyone’s agenda.

But it would have been fun if we had. That, though, is reserved for superpowers with a sense of chess and carrying a genuine big stick.

One wonders how Iran sees all of this?

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