Bahrain: Oil Price Flashpoint?

By Josh Lipton It's the still-unfolding crisis in Japan that understandably dominates the headlines but, for the oil market, there is another critically important event for market participants to consider: the dramatic escalation of violence in Bahrain. There, the government has now declared a three-month state of emergency and reportedly handed wide powers to the armed forces as it moves to put down demonstrations a day after Saudi troops arrived in the Arab Gulf state. The worry, say energy analysts, is that the violence spills over into the oil-rich, eastern territory of the Saudi kingdom.

(To see James Debevec's piece on how commodities are now resembling the tops in 1951 and 1980, click here.)

By way of background, the Bahrain uprising consists of two parts, says Dr George Friedman, the founder and CEO of Stratfor. The first is genuine grievances by the majority Shiite population -- the local issues and divisions. The second is the interests of foreign powers in Bahrain. Specifically, he says, the (Shi'a) Iranians clearly benefit from an uprising in (Shi'a) Bahrain. The uprisings in North Africa and their spread to the Arabian Peninsula represent a golden opportunity for pursuing Iran's long-standing interest, going back to the Shah and beyond, of dominating the Gulf.

To Michael Gayed's view on what is working in the stock market, click here.)

The (Sunni) Saudis recognize that this poses a fundamental risk to their regime, and after consulting with the Americans, have led a coalition force into Bahrain to halt the uprising and save the regime. “We are now off the map, so to speak,” Friedman wrote in a recent research report. “The question is how the Iranians respond, and there is every reason to think that they do not know.” Oil prices had slid about 5% in the past week, on expectations of reduced demand from Japan as that country reels from the devastating earthquake, tsunami and potential nuclear crisis. Even so, oil is up about 12% since December, when protests first erupted in Tunisia and spread throughout the Middle East and North Africa. This afternoon, the price of oil is up about 1% to $98. The SPDR S&P 500 ETF (SPY) -- which includes holdings like ExxonMobil (XOM), Apple (AAPL), Microsoft (MSFT), IBM (IBM), and Bank of America (BAC) -- is down 1.3%.

To read Satyajit Das' piece on why the tragedy in Japan shows how hard forecasting is, click here.)

It isn't specifically Bahrain that represents a threat to the oil market, say energy analysts, but rather broader anxiety over whether that civil unrest could spread to Saudi Arabia's eastern, predominantly Shiite territory. “It is a contagion effect,” says Michael Lynch, president of Strategic Energy and Economic Research, a consulting firm in Amherst, Massachusetts. “Bahrain is not important to the oil market, but it is next to Saudi Arabia. That causes people to become very concerned about the prospect of a spillover into the eastern province in Saudi Arabia, which is where all the oil is produced.” Lynch says that the probability of such contagion is low, but Saudi Arabia is so critical to the oil markets that even a low probability event raises prices. Saudi Arabia is the world's largest oil exporter and second largest producer after Russia. From his perch, Lynch forecasts oil prices remaining around $90 to $100, until there is resolution to the ongoing civil war in Libya. A spike to $120 is possible should there be violent protests in Saudi Arabia, or any kind of sabotage at its oil facilities -- potential risks that he considers “highly unlikely but not impossible.” Still, while acknowledging the anxiety in the oil markets that Saudi military intervention creates, energy analysts argue that, for now, the conflict in Bahrain does not appear to pose a credible threat to production.

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