If Syria Falls, Expect a Pop in Oil Prices

03-Jul-2013

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An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. Oxstones.com also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.







By Marin Katusa, Casey’s Research,

As is so often the case in the Middle East, religious strife contributes to political strife… and because of the region’s importance in worldwide energy markets, all that strife can foster serious economic uncertainty. The current violence in Syria has followed this predictable trajectory thus far. A US-Russian conference aimed at resolving the unrest has raised hopes of peace, but given the success rate of previous such conferences, one would have to be quite naïve to believe an enduring peace will be achieved. Thus, prudent energy analysts and investors need to consider a variety of outcomes.

If Syria does fall, the next logical target would be Iran, which would create chaos in the global oil markets. Today, Iran provides about 20% of China’s daily imported oil – only Russia provides more. China has actually been increasing its dependence on Iranian oil, which means that China cannot keep its economic machine running if the Iranian oil supply decreases. Also, if Iranian oil stops flowing to China, the Chinese will be required to go to other sources to buy over 500,000 barrels of oil, which would instantly increase the spot price of oil. That rise could be as much as 20% overnight as traders begin worrying about the increased risks in the Middle East.

Just what is going on in Syria? Syria is the first salvo in a war that puts Iran, China, and Russia against the US and its allies. The American government has thrown its weight behind the Sunnis, whereas Iran, China, and Russia have been backing Bashar al-Assad, the Shi’a leader in Syria.

What’s the difference between a Sunni and a Shiite, you ask?

A quick history lesson: Contrary to what the mainstream media may assert, not all Muslims are of the same cloth. Just as there are different denominations of the Christian faith – for example, Protestants and Catholics, which have gone to war many times in the past – the two Muslim factions are the Sunnis and the Shiites.

The roots of the differences go back to the 7thcentury CE, with the death of the prophet Muhammad. Those who accepted Abu Bakr, Muhammad’s father-in-law, as caliph (meaning successor) became known as the Sunnis. Those who believed that Ali, Muhammad’s son-in-law, should be caliph became the Shiites. From there, the differences grew, many battles ensued, and a schism formed between the two groups.

Why has the American government backed the Sunnis, you may ask. Saudi Arabia is the short answer.

If a decisive Shiite victory were to occur in Syria, it would have enduring implications throughout the Middle East, but most importantly in Saudi Arabia. Though Saudi Arabia’s population and leadership are both Sunni, and two of the holiest cities of Islam (Mecca and Medina) are situated in the country, the oil-producing areas in the eastern portion of the country have significant Shi’a populations. If an uprising were to occur there in response to Shiite success in Syria, Saudi Arabia’s oil production (as well as economic, political, and social stability) would suffer a huge setback.

It is critical for both the US as well as the European Union that Saudi Arabia stay as it is to keep the balance of power intact in the Middle East. That’s seen as a necessity for stability in the global oil markets. If Saudi Arabia’s oil production were to stop, we could be looking at US$200 or more per barrel of oil immediately. That’s how important Saudi Arabia is to the spot oil price.

More important for the American government, if Saudi Arabia stays the way it is, the lifeline of the petrodollar will be extended. Its fate is intertwined with the fate of Saudi Arabia; so when the people ask why the Americans spend so much on military might in the Middle East, the answer becomes clear. The actual cost of the US military presence is negligible when considered against the loss of the petrodollar – which would likely accelerate the demise of the US dollar as the world’s reserve currency. The cost to Americans for almost everything would double overnight. Inflation would be wild, and the US economy would be crippled. Chaos would be the new normal.

We are still a few battles away from the demise of the petrodollar, but it is critical for the US to have Syria fall. If it doesn’t, this strengthens the Shiites in Saudi Arabia, which also strengthens the existing regime in Iran. Both of these outcomes are bad for the US government and its geopolitical interests.

So, knowing this, can this information help you make money from the energy sector? You bet.


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