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The Energy Trouble Center Nobody’s Talking About (Yet)

by | published April 7th, 2015

This past week, Brent crude oil has surged 7%, to $59.04 a barrel. One reason for this upswing has to do with the disappointing call I just received from the government of Bahrain.

I’d been looking forward to delivering the keynote address at a conference in its capital city, Manama. But now the government has cancelled my appearance, and the U.S. Department of State has even seconded the conclusion.

What’s keeping me out of Bahrain, a wealthy, tiny island country in the Persian Gulf? The threat of Sunni-Shiite violence, which is spreading throughout the Middle East and North Africa. There’s no sign that it’s slowing down.

But Bahrain isn’t the only country with troubles pushing oil prices higher. In fact, this instability is threatening one of the world’s oldest oil-producing nations. Although it’s off the radar for most Westerners, trouble in this little country could have a sharp impact on your energy investments.

My contacts there tell me that this could get nasty… fast.

“Arab Spring II” Is Heating Up

First, let’s examine the three well-known “global hotspots” pressuring the oil price upward.

Two years ago, during the so-called “Arab Spring,” Bahrain provided the only example of Sunni versus Shiite violence. Bahrain has a Shiite majority population and a Sunni minority governing family. The island nation is connected to Saudi Arabia by a causeway… and is just north of major U.S. operational bases in Qatar.

With such a strategic location, Saudi Arabia stepped in to curb the 2013 violence in Bahrain. It sent its army and police force over the causeway to occupy Manama.

But now anti-regime protests in Bahrain are on the rise again. And elsewhere in the Muslim world, “Arab Spring II” is heating up and dragging oil prices along with it.

Yemen continues to unravel, with Shiite rebels there establishing alliances with rebels in the Horn of Africa, just across the Mandab Strait.

The Mandab Strait connects the Gulf of Aden with the southernmost part of the Red Sea. It is a lynchpin in sea traffic north. And trouble there would put pressure on a main Saudi crude export facility further up the coast at Yanbu. Some 5 million barrels a day flow through Saudi Arabia’s largest pipeline (the East-West Pipeline) to that port.

There’s disturbing information also leaking from Saudi Arabia’s Eastern Province, home to most of the country’s 8-billion-barrel-per-day oil production. It is also the only Shiite majority area in Saudi Arabia. The new Saudi King Salman is blaming Shiite groups from neighboring Iran for directly fomenting unrest in the region, forming a pincher action of domestic instability in the east and Yemen to the south.

The New Energy “Trouble Center”

But there’s a new “trouble center” with more direct implications for both crude oil and natural gas exports.

Sectarian unrest is creeping into Azerbaijan, a vital oil and natural gas supplier to international markets. The nation currently holds an estimated 7 billion barrels of proven crude oil reserves. Should this small nation show signs of instability, it could have a quick and sharp impact on global energy market prices.

As veteran readers of OEI well know, I am in Baku frequently for a variety of consulting and policy purposes. Baku, once called the “Black City” for being literally covered in oil, is the capital of Azerbaijan. It’s the origin of the Baku-Tbilisi-Ceyhan Pipeline, which carries natural gas to a terminal in the Mediterranean. And it’s also the target for new natural gas pipeline initiatives that aim to lessen European dependence on Russian export. Truly, this little-known country is becoming a focal point for the energy industry.

Aj-map

While Azerbaijan has a Shiite majority population, it has not previously been prone to sectarian unrest. That’s now changing with parliament elections coming later this year.

The opposition to President Ilham Aliyev is growing, as are the more punitive responses from the government. Recent low oil prices have hampered Aliyev’s ability to stem inflation, offset unemployment, or use the State Oil Fund (SOFAR) to meet social needs, sparking anti-regime demonstrations. But under the guise of human rights concerns, some of the political opposition more closely resembles a Shiite sectarian movement headed by radical imams of some public impact.

In addition, Azerbaijan also used to be the northwestern province of Iran. A reinvigorated Iran (following the apparent “agreement” with the 5+1 on nuclear aspirations – details TBA) reunited with Azeri Shiites would fundamentally change the entire Caspian region and its export potential.

Feeling the Domino Effect

In classic knock-on fashion, this would put greater pressure on Kazakhstan, which lies on the northeastern border of the Caspian Sea. The Kazakh oil/gas production picture has been languishing due to drooping prices, and unrest is slowly building. This is not currently a Sunni-Shiite problem. But Kazakhstan is feeling the domino effect from “Arab Spring II” nonetheless.

As the sectarian problem expands in the Middle East and North Africa and spills into the region of the Caspian Sea, the impact on oil reliability prospects will increase. Look to see upward pressure on oil prices throughout the summer.

Being able to understand these geopolitical wildcards remains a crucial element to navigating through energy investments. I’ll use my international contacts and boots-on-the-ground experience to keep you abreast of any new developments.

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  1. Paul Ellenbogen
    April 7th, 2015 at 22:00 | #1

    The world is so complicated! The Us will have to maintain a significant military presence there forever it appears. Even though crude builds and inventory r rising, energy stocks appear to have bottomed and spot prices rising portends higher prices second half baring an unforeseen event

  2. Peter Peeters
    April 8th, 2015 at 02:18 | #2

    When do you expect the Sunni-Shiite religious/etnic problems will brings serious higher oil prices…..This year or next year. I do like especially your oil comments. Thanks. Peeters

  3. Colin
    April 9th, 2015 at 19:40 | #3

    I have a quite a bit invested in oil stocks should I hold and wait for oil prices to go up or in your opinion is oil going to drop in the short term

  4. tony traino
    April 12th, 2015 at 12:15 | #4

    need more information

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