Oil Hits 32-Month High as Middle East Unrest Persists

With the civil war in Libya now entering its third week, Egypt moving haltingly towards free elections, and hundreds dead in Syria, Yemen and Bahrain after a month of anti-government protests in each country, the Middle East is rife with instability. On Wednesday, April 6, that instability pushed the spot price of Brent oil above US$123 per barrel—a high not seen since August 2008 when prices were crashing from an all-time peak of US$147.50 on the eve of the financial crisis.

The Organization of Petroleum Exporting Countries (OPEC) is brushing aside pressure to act, saying it is already doing all it can to subdue the rally.

"All that OPEC can do is provide the market with the oil it needs, and it is doing that," said Hussain al-Shahristani, Iran's deputy prime minister for Energy Affairs, at a Paris oil conference. "We have not seen any slowdown in growth."

Indeed, OPEC members Saudi Arabia and the United Arab Emirates (UAE) have increased their daily production to make up for lost production in Libya. The moves mean daily OPEC output fell by only 300,000 barrels per day (bpd) in March despite the disappearance of 1.6 million bpd (Mbpd) from Libya. On this basis, OPEC has concluded the market is divorced from the realities of supply and demand and is instead being driven by political upheaval and fears.

"There is little we can do in terms of price control," said UAE Oil Minister Mohammed bin Dhaen al-Hamli. "The market should pay more attention to real supply rather than imagined shortages. International markets are choosing to ignore market fundamentals and bet on the worst-case scenarios."

That may be the case. Unfortunately, several worst-case scenarios remain very likely. OPEC may be able to make up for lost Libyan production for now, but that ability depends on fundamental relationships behind the Middle East remaining stable. And those fundamental relationships are in jeopardy.

The first questions concern Egypt—the most populous Arab country and a historic giant, in terms of culture and regional politics. If Egypt can manage a reasonably smooth transition to democracy, it will act as a model and stabilizer for the entire neighborhood. Since Hosni Mubarak was forced to resign on February 11, the Egyptian revolution has taken a backseat within the global media to Libya and Japan. But the country has made progress.

Voters approved amendments to the constitution that open up the political process. A new president will be limited to two terms in office and limitations on who can run have been lifted. Parliamentary elections are scheduled for September, and presidential elections will follow. The interim military council currently running the country doesn't seem to want to hold onto power longer than necessary.

That is all well and good, but the hasty voting schedule favors established parties like the Muslim Brotherhood and Mr. Mubarak's National Democratic Party. Those who drove the revolution are still struggling to organize into political parties. With police presence much reduced, crime rates are up. On top of all that, the economy is suffering due in large part to the vital tourism industry being way down. The finance minister more than halved the country's expected growth rate for the year to 2.5%.

Then there are the foreign policy questions. Egypt says it will honor its international treaties, including its key 1979 peace pact with Israel. That peace treaty made Egypt the first Arab country to officially recognize Israel and paved the way for the United States to begin economic, military and political relations with the Arab giant. It is one of the most important peace treaties within the Middle East and has long cast Egypt as a mediator between Palestinians and Israelis—and yet, Cairo also announced it will resume diplomatic ties with Iran after a break of more than 30 years, which begs the question of whether a link to Iran will hurt Egypt's mediating abilities.

Then there is Syria. Overlooked and underestimated in importance, Syria has been struggling through its own political uprising for three weeks. The mere presence of protesters in that country is a feat, as Syria is the Arab world's most-ruthless dictatorship; and the implications of a Syrian regime change would be significant.

Syria's principle allies are Iran and the Lebanese Shiite militia Hezbollah; together the three stand against Israeli and American aspirations in the region, working to destabilize Lebanon and promote the Hamas rule in Gaza. In recent years, Syria-Turkey relations have flourished and Damascus has become the cornerstone of Ankara's ambitious Arab policy. And, if post-Mubarak Egypt stops blindly supporting Israel, Syrian-Egyptian tensions could rise. In general, if Syria were to fall into disarray, it would leave a regional power vacuum that could turn the ever-precarious Middle East on its head.

Syrian President Bashar al-Assad follows in the footsteps of a father whose 30-year rule included a brutal repression that is regularly described as the "single-deadliest act by any Arab government against its own people in the modern Middle East."

In 1982, Hafez al-Assad instructed his army to crush an opposition movement led by the Sunni Muslim community that was centered in the city of Hama. Under a scorched-earth policy, government troops leveled parts of the city with artillery fire and indiscriminately killed 10,000–25,000 people (the highest estimates reach 80,000); the vast majority of casualties were civilians.

Since the 1982 Hama massacre, dissidence has been very muted in Syria. Hafez died in 2000, and the presidency passed to his son. Bashar promised reform but has actually changed little, continuing his father's zero-tolerance policy for opposition, maintaining tight control over freedom of speech and the Internet and keeping a tight alliance with Iran.

If you need further proof that Bashar is unwilling to relinquish control, look no further than Syria's 48-year state of emergency. Implemented in 1963, after the Ba'ath Party took over power in a coup, the law effectively suspends constitutional protection for citizens, enabling the government to make preventative arrests and hold suspects without charges while denying detainees the right to file court complaints or have lawyers present during interrogations. The Assad's have used the threat of war with Israel as an excuse for keeping the law in place for almost 50 years.

The U.S. State Department's 2009 report on Syria documented numerous serious human rights abuses in the country, including arbitrary or unlawful killings, enforced disappearances and the vanishing of an estimated 17,000 people. Syrian prisons employ torture methods ranging from electric shocks to sexual assault to beating on the soles of the feet. Yet, in the face of this kind of dictatorship, this kind of brutal authoritarian rule, Syrians are starting to rebel. In three weeks of protests, demonstrators have been calling for basic freedoms through political and economic reform, the release of all political prisoners and an end to emergency law.

President Assad has responded with a heavy hand. Government security forces have killed more than 100 people, many shot by rooftop snipers during peaceful protests. Protesters say their members are regularly arrested and beaten, often to death. To make matters worse, Assad blamed Israeli provocateurs, rebel forces and foreign agents for the bloodshed—anyone but his own forces.

Syria is another country wherein a family from a minority group rules over a majority of different religious affiliations. The Assad family is Alawite, a branch of Shiite Islam that represents just 11% of Syria's population. The rest of the 22 million people in the country are overwhelmingly Sunni Muslim. On top of that strife, the Assad family has long denied citizenship to the country's 1.5-million-strong Kurdish minority, leaving Syrian Kurds unable to find work or enroll in school.

Keenly aware of his country's sectarian divisions, Assad has packed the Syrian army ranks with loyal members of the Alawite minority. This means that, unlike the armies in Tunisia and Egypt, who generally refused to confront non-violent protesters—and in doing so spelt the demise of their autocratic rulers—many senior Syrian military officers know their fates are tied to Assad. As such, the military has great loyalty to the president.

Assad's response to date has been an iron fist in a velvet glove. He has spoken abstractly of reform but offered little in concrete terms. He has told his people to be patient, that there is no need to demand reform because he is working tirelessly to provide it. Meanwhile, his troops continue to kill protesters in the streets. It's a frail balance for the country, and one that will not last.

Syria is a key player in Iran, Iraq, Turkey, Lebanon, Palestine and Israel. Its internal problems now threaten to reshuffle the cards, adding to the general sense of insecurity and latent violence in the region. In addition, Syria's internal stresses exemplify one of the biggest threats in the Middle East: Sectarianism.

Several Middle Eastern states were built on a mosaic of old religions, sects and ethnic groups held together uneasily by central governments, many of which capitalize on the divisions to maintain power. Open conflict between Sunnis and Alawites in Syria could catalyze other countries into sectarian strife, adding a major new dimension to the region's instability.

In short, there are a lot of scenarios that might play out in the Middle East but few, if any, involve stability. So, if oil traders and analysts are focused on worst-case scenarios, they are really just doing their jobs.

Nevertheless, further major developments in the region won't likely happen overnight. The loss of Libya's output already has been priced into the market; so, with no immediate threat to other Middle Eastern or North African supplies, traders are becoming hesitant to chase prices higher within the current rally. In the longer term, however, most oil market movers and shakers expect instability to reawaken and send prices back up.

Reuters surveyed 32 major oil traders, bank analysts and hedge fund managers in the first week of April, launching the poll after Brent oil gained $8 in five days to surpass $120/bbl. Two-thirds of those surveyed expect the current rally to fizzle out fairly soon but think oil will roar back above $130/bbl in the second half of the year. One in five expects oil to hit $150/bbl by the end of the year.

We all like to gripe about greedy traders pushing up the price of oil but, at present, the most important oil-producing region in the world is grappling with fundamental changes, the results of which are almost impossible to predict. Uncertainty makes commodities more expensive. And for at least the rest of the year, uncertainty is the most reliable aspect of oil.

Investing doesn't happen in a vacuum. That's why Marin Katusa and his Casey Energy team are always on the cutting edge of current world events, analyzing complex political and market situations to glean the best profit opportunities in energy. And with oil shooting up as it does, one overlooked renewable energy is poised to gain big. Learn more here.