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The Crisis Unfolding in the Middle East (and What I Won’t Be Telling FOX Tomorrow…)

by | published February 22nd, 2011

I’ll be on the air again tomorrow afternoon, shortly after 2 p.m. Eastern, talking to Brian Sullivan of FOX Business Network. Brian wants my views on events in the Mideast and the continuing surge in oil prices.

But I thought I would fill you in first on what I plan to tell him… and what I won’t tell him about how investors should play triple-digit oil.

The Risk Factor Is Taking Center Stage

We are now looking at the prospect of significant and sustained instability in the region of the world that’s home to two-thirds of the known crude oil reserves.

It has already sent shivers through the international energy sector, and the problems are likely to be getting worse.

Brent crude prices in London are closing in on $110; there is no reason to suspect they will retreat anytime soon. Meanwhile, in the U.S., the March futures contract for West Texas Intermediate (WTI) – the benchmark for New York traded futures – closes today, and the April contract is already $97 at market open this morning (it breached $98 overnight). Both Brent and WTI opened today at two-and-a-half year highs.

The futures contract curve reveals that traders do not regard this as a short-term problem.

We have an escalating and contango market – one in which each month further out has a higher price than earlier months. In addition to the uncertainty spiking prices, traders will have to unwind shorts immediately. The market holiday yesterday will make that an even more essential move today. They were betting on the crude oil price declining, and they were absolutely wrong.

If ever there were doubts that exogenous (outside of the market) forces could dictate trade, the current events will push them aside. The volatility will now kick in big-time… and that will further unnerve the trading environment.

A Protracted – and Violent – Struggle Is Underway

Tunisia and Egypt were disconcerting. But the events in Cairo may end up being the exception to the rule.

The unrest in Bahrain and Libya is far more dangerous. The unraveling of autocratic rule in the Middle East and North Africa (MENA) will not be a peaceful event.

With Libya, we have a major source – and one of the last sources – of light, sweet (low-sulfur) crude. This is most prized by refiners because it requires the least processing expense. There is one other source. Unfortunately, that happens to be Nigeria – a place not particularly known for its stability either.

Libya is descending into civil war; the foreign oil companies have stopped activities and have begun pulling out most of their personnel. As of 9 a.m. this morning, 6% of production in the country is offline… and that number is growing.

Europe is directly in the path of this interruption, since it is the end user for about 80% of all Libyan exports.

The bodies in the streets of Tripoli and Benghazi are a harbinger of what is to come. Unlike the army in Egypt, which served as a restraining influence, the army in both Tripoli and Bahrain is a weapon against the crowds and a virtual guarantee of further bloodshed. Neither Gaddafi nor the ruling family in Bahrain will be leaving voluntarily.

And that means a protracted struggle is underway.

In Bahrain, however, something perhaps far worse is on the horizon…

The Perfect Storm That Everybody Wanted to Avoid

In Bahrain, there is oil, but there is also the incendiary religious division – a Sunni minority ruling class against a majority of Shiites. Combine that with the acute economic problems experienced by average people throughout the region, and frustration is leading to rage.

Bahrain is also located, strategically speaking, in the worst place for such an uprising.

Yes, the U.S. bases its Fifth Fleet there, and that has been a primary ingredient in American Persian Gulf policy. If the fleet needs to leave, that will provide another ingredient in rising regional instability.

However, the real problem is this.

Bahrain is a 665-square-kilometer archipelago directly across the water from Iran and connected to Saudi Arabia by a causeway. Tehran has almost certainly started to provide support to a Shiite uprising; but the Saudis will do everything they can to prevent one.

This is because Bahrain connects directly to the eastern province in Saudi Arabia that contains its principal oil production. That province also has a Shiite majority. When Ayatollah Khomeini led the Shiite revolution in Iran back in 1979, the Saudis had to use the military to put down a revolution in its own province. This time around, Riyadh will not wait for that to happen.

The concern over contagion – the spread of unrest throughout the region – is certainly genuine.

That means the volatility prompted in futures oil prices will be figured into the unfolding dynamic for some time.

Now for what I will not be telling the anchor on FOX Business tomorrow afternoon…

How to Play Triple-Digit Oil

There are three overarching considerations here, and we are seeing these moves already this morning.

First, the primary hit will be taken by those oil majors with exposure to the region and the impact the region’s events are having on the broader oil market.

The big boys will survive, but they will have to counterbalance developments in places like Libya with production from other areas. That will take some time.

Watch the well-focused medium and smaller-sized companies, especially North American operations. They will be the primary beneficiaries.

Second, this will generate at least a short-term impetus for the transition from crude oil to natural gas. Expect primary natural gas producers to experience a pop. The longer the crisis remains, the more the transition between these fuels will gather steam.

This should also be the case with high-grade coal holdings and alternative energy. However, there are other factors at work in both sectors. In the first instance, there’s the unwinding of the global coal picture, with Australian volume slowly coming back online after severe flooding; and in the second, there’s the length of time needed to move significant renewable and alternative energy capacity into those sectors where rising crude oil prices would dictate a switch.

Yes, this is another reminder that ultimately means a move away from crude as the energy source of choice. But crises demand more immediate solutions; they rarely allow for a period of R&D.

Finally, at these prices, all sources of unconventional and synthetic oil become attractive, especially if they are not in the region coming unglued.

For North America, that means Canadian oil sands and American or Canadian oil shale are back on the front burner. As the MENA sourcing for conventional crude becomes a rising issue, these alternatives already producing closer to home are a ready substitute.

It used to be a problem of price. But at triple-digit levels for crude on both sides of the Atlantic, that is no longer an issue.

Sincerely,

Kent

[Editor’s Note: To get Kent’s energy portfolio with specific recommendations, just click here.]

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  1. February 22nd, 2011 at 13:59 | #1

    you have influence on the govs as to tell Angela Merkel not to threaten Gaddafi as she is in no way aware of what is really going on,
    thus challenging the good connection that was originally intended between Arab countries and the EU… while her support from the former East Germany was implementing too many restrictions the Stasi way.. National security is one thing, trying to abuse power and override it, is another… with world issues at stake for trifles in the backyard and good people blocked from office to render the reigns to imbeciles???

  2. Gary Semlak
    February 22nd, 2011 at 14:15 | #2

    Is Latin America, namely, Venezuela a possible candidate for major disruption? What would the impact of that be?

  3. Adriaan van Gennep
    February 22nd, 2011 at 15:42 | #3

    I was living and working for over 20 years in Russia in a very scary time. I have seen and predicted the difference between Russia, Europe and the rest of the world within last 20 years, and allway’s was right. What I see now is not a shift in politics, but a fight for raw materials and oil. In the Middle East today mainly a religeous fight between Soennies, Shiite’s and Kurdsr, this is religeous. The west is loosing because the stupidity and arrogance of the political scene. Russia is still begging in the EU states to be a member of WTO and scrapping visa issues and getting “”normal”” relations for many years without results. Now South Americans don’t need visa anymore next month to Russia, do you know what it means ? Europeans are within a decade third-class citizen’s of their own region’s. US is going down and all dollar related countries (non-convertible currencies) are starting up for a long period of creating their own stability leaving the rest of the world in dark and misty clouds of their own home-made invention of embazzeling from trillions of euros and dollars over the back of their own citizens. So, the powershift shall shake the world this time for at least 10 years more and so long the mondial crisis shall last with all events starting form this week. It’s not all about oil.

  4. Net Browser
    February 22nd, 2011 at 16:36 | #4

    @Adriaan van Gennep
    What the heck was that ramble all about? Learn how to construct a sentence that make sense if you what to be taken seriously!

  5. Stanley
    February 22nd, 2011 at 17:24 | #5

    @Beate Biehn-Blank
    WHAT ON EARTH ARE YOU TALKING ABOUT? YOUR COMMENTS ARE TOTALLY INCOHERENT.

  6. Jennie
    February 22nd, 2011 at 17:25 | #6

    @Net Browser

    I would concur, Adriaan, except that I’m afraid to say the same could be said of you, at least as pertains to your spelling errors. . . .

  7. Stanley
    February 22nd, 2011 at 17:28 | #7

    @Adriaan van Gennep
    what was that all about?. I agree with Net Browser.

  8. Stanley
    February 22nd, 2011 at 17:31 | #8

    @Net Browser
    Do you understand what Beate & Adrian are talking about?
    I certainly don’t.

  9. mario filimbaia
    February 22nd, 2011 at 18:15 | #9

    I’m invested since 2009 with “GAZPROM CAPITAL” corporate bond-maturity2016- coupon 6,5%. It’s been a good play until now (a big increase in nominal value).What do you think about Gazprom future, taking in account the new market view of nat.gas from convent.and unconvent. sources?It’s better sell the bond now in bonis or maintain it some time more?
    Thanks and best regards

  10. Mark Thompson
    February 22nd, 2011 at 21:19 | #10

    @Net Browser
    Let it go, Net Browser. The rantings of the semi-literate should be ignored.

  11. tom
    February 23rd, 2011 at 03:39 | #11

    I read the van gemp #3 and find this to be thru. As all western companies has followed the market greed. Make short time profit with transfering know how and production ability to china and other low cost countrys they have made us europe and maybe usa too to become what africa has been for to many years. a underdeveloped country.
    The spiral is not going in the direction it should from here

  12. Laura
    February 23rd, 2011 at 05:42 | #12

    To Net Browser

    Youre a bully. I am a native English speaker and I found
    what Adriaan had to say interesting and mostly understandable.
    Also, I was an ESL (English as a Second Language) teacher
    for years, and it doesnt take any training to see when someone is
    not a native speaker, but able to express complex thoughts anyway…
    in my book, thats courageous. Be grateful you speak the worlds
    choice for a common second language, and have some patience
    for those that have made an effort to learn it. AMericans mostly
    cant be bothered. They can barely construct a complex sentence,
    dont even know what that is and most
    cant tell you who the allies were during the War! Let alone
    speak a second language coherently…Time to update, perhaps..

  13. Wm. Paul VanderWerff
    February 23rd, 2011 at 06:28 | #13

    There is a private company “RedLeaf Resources Inc in Salt Lake City. They have built a pilot plant in the Green River Utah area that demonstrates the ability to produce, through an institu process, oil for $22.00 a barrel. The impact on the land is negligible. The process uses no water and the land is restored on a continuing basis. They have Utah State and school trust lands under contract which hold about 1.5 Billion Barrels. Their process is by far the most eco-friendly. Unlike the retort method of heating, which requires large amounts of water and produces alarming amounts of nasty by-products, their system results in a light sweet crude. If you aren’t familiar with them check out their web site http://www.redleafinc.com.

  14. Dean Rhodes
    February 23rd, 2011 at 09:19 | #14

    Just 3 years ago Obama blamed Washington politics and in particular Bush and Cheney for high oil prices. Whats his excuse this time?

    http://www.youtube.com/watch?v=dnLP12X3EgM

  15. February 23rd, 2011 at 12:20 | #15

    Laura:

    You had me agreeing with you up until you started bashing Americans. You did something really nice and compassionate taking up for Adriaan. then you go and blow it by being nasty, regardless if it is true or not.

    Of course I am an American, so please excuse my grammar.

    It is way past time we start excepting each other for who we are, imperfections and all! We have proven to ourselves over and over, how nasty and greedy man can be. Why not do something different and actually care for each other, showing compassion and taking up for those who are made fun of etc. Come on people, have a heart! Forget the brain for a bit. I kNOW we can do it! Just pretend each persons life is a mini disaster. We always come together for a disaster. If you think about it, it is kind of true, living how we have been living. Its just way past time for a change and we can only change ourselves!!! So lets start! I promise, once we do, good things will start happening.
    Sorry, will get off my soap box. I have never posted here before and normally would not have. Laura struck a cord so thank you Laura.
    Gina
    Gina

  16. Howard PASCHKE
    February 23rd, 2011 at 12:48 | #16

    AMEN to laura #13 from an elderly farmer!

  17. clearprism
    February 25th, 2011 at 11:41 | #17

    I agree with Beate and am most thankful for Adriann’s insight. I thank Laura for her gumpshun(sic)to speak the truth. Even though some one is a moderator for a site/blog, etc., this does not mean they are well read or well spoken. I, and I think many others like me, find it hard to find people with which to have intelligent conversation. Maybe that is why the internet is so popular. With the click of a button, you can find others to ‘chat’ with who speak your language, so to speak. (no pun intended, lol) Alot of change is coming down the pike and I can not be in more than one place at a time so I look for the ‘Adrianns’ in the comments of important articles. They give me a chance to understand these happenings from a different perspective. Again, thank you Adriann, Beate, Laura and, you,Old Farmer. God Bless us all. Crystal

  18. clearprism
    February 25th, 2011 at 11:46 | #18

    Gary, it was proposed by some that the Haiti earthquake was staged…please bear with me. I am not saying I agree or disagree, the jury is still out for me, however, in Venusuala(sic) it was suggested that the aid to the earthquake victums in Haiti by our military was to establish a jump off point for invasion of Venusuala(sic). Now wouldn’t it be interesting if we were to do just that!?

  19. clearprism
    February 25th, 2011 at 11:52 | #19

    Also, to address many of the issues touched on by posters so far, I think the Amish have it goin’ on. Oil and it’s availability will not affect them, electricity and water are none issues,the ability to have a decent conversation without the aid of gagetry and spell check will be a big plus in the coming times.

    The only draw back I see for them is how they will protect what they have worked so hard to preserve…they are committed to none violence…but the ones who will be looking them up will not be so gentle.

    Please, Pray for your neighbor and give those around you a hand…while you still can.

    Blessing from the Reservation, Crysal

  20. March 3rd, 2011 at 06:57 | #20

    The crude oil prices are increasing due to speculations. Really Libya is providing not more than 2% from the world capacity of crude oil, so this should not be threated as crisis. Everything is coming from speculations only.

  21. westhampnett
    March 21st, 2011 at 22:50 | #21

    @Laura
    Thanks Laura. You said what needed to be said. I would hate to see Americans gain the same reputation for rudeness toward non-native speakers that the French are notorious for.

  22. Marie
    March 29th, 2011 at 19:05 | #22

    Wake up everyone, our country is going down fast enough without us fighting each other. Stop buying imported products, including cars and support our own domestic products. Be frugal and be loyal to our country by helping the poor here and not sending money abroad, as “charity begins at home”. We have a lot of homeless folks, but we ignore them and instead send aid to foreign countries. What is wrong with this picture? The billions we give to other countries to fight drugs, we can use to police our borders and keep them away.

  23. Stephen Kennedy
    May 31st, 2011 at 14:18 | #23

    Oops, I thought that this was A blog about investing and discussing the best way to preserve and grow our capital.
    It seems to have turned into a political treatise with a minor in spelling and grammar.

  24. Mark H. Bongo
    July 5th, 2011 at 13:10 | #24

    For me Arab was taking advantages in their Oil Source Prides for the prices to rise faster as what they’ve expected in the middle of the war crisis….No matter there is people power and civil war of their country they can still keep their Oil prices in rising faster for their further recovering through their expected Oil earnings….

  25. January 11th, 2012 at 15:42 | #25

    @Laura Completely agree with Laura. Adriaan’s comments were obviously those of a non-native speaker of English. I pretty much understood all he wrote. Americans are a very isolated people…a true ‘Island Nation.’ From our delusional leaders to our arrogant “our way or the high way” couch surfing experts on the world (because they watch US Gov’t licensed TV (God help them)), America is full of embarrassingly ignorant people. That is why the world hates America….not our [lack of] freedom (give me a break, GBush).

  26. Nicole Ward Drasperton
    February 9th, 2012 at 05:15 | #26

    Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding.

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