Markets continued to focus on the oil price this week as fears of unrest spreading across the Middle East kept investors on edge. Libya appeared close to outright civil war. Meanwhile, demonstrations erupted in Oman, the small Gulf state that has been stable for decades, and protests in Bahrain intensified. Clashes between protestors and security forces were reported in Iran.
By midweek, oil was heading back towards last week’s high of $120 a barrel and gold had hit a new record. Global stocks retreated further from their recent post-credit crunch highs. Saudi Arabia’s market slid 7% on Tuesday alone. It has fallen by almost 20% over the past fortnight.
What the commentators said
“The flash-fire is spreading,” said Global Risk Management’s Thorbjoern Bak Jensen. The worry now is that the biggest oil producer will face its own protests and won’t be able to deliver the oil required to make up for supply interruptions elsewhere. “If Saudi Arabia starts to rumble, $120 per barrel is cheap.”
Even now there may be less oil available than people think. As many analysts have pointed out, Saudi Arabia should have enough spare capacity to make up for a loss of Libya’s production. But as it produces a different type of oil that is harder to refine, it’s not a case of one Saudi barrel replacing one Libyan one.
And some worry that “Saudi Arabia has been lying” about its reserves “for decades”, according to commodities guru Jim Rogers. The last two times they said they would raise production “they couldn’t”, he said. It’s certainly interesting to note that production hasn’t risen for five years. Saudi Arabia is also increasingly using its oil for its own population, said Gregor McDonald on the Gregor.us blog. “It remains decidedly unclear whether Saudi Arabia can indeed turn on extra taps at will.”
As for unrest in Saudi Arabia itself, the market’s slump shows that local investors “are beginning to think the unthinkable”, said Una Galani on Breakingviews. Protests are mounting in Bahrain and “have appeared out of the blue” in Oman. Both these states are richer than the kingdom on a per-head basis. And as in other countries in the region, there is a huge number of underemployed under-25s who are well-connected online, said Matt Lasov of Frontier Strategy Group’s Quantitative Analytics. This has proved to be “a dangerous combination elsewhere”.
Another important issue is that the oil-rich eastern province of Saudi Arabia has a significant Shia minority. Shia protests in nearby Bahrain could spread to the Sunni-dominated kingdom, said Robin Wigglesworth in the FT. It doesn’t help that a prominent Shia cleric was arrested this week. There are now rumours of major protests planned for later this month. Political risk in Saudi Arabia, concluded Usha Harley of Auckland’s Massey University, is “high”.