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6 Critical Money Making Rules

Arab Spring and Crude Oil Prices

Commodities / Crude Oil Sep 18, 2012 - 07:41 AM GMT

By: Chris_Vermeulen

Commodities

Crude oil prices hit a four-month high this week on the back of rising tensions in the Middle East and North Africa and the unfortunate murder of the U.S. ambassador to Libya. Added impetus on the upside was given to oil by the announcement of more money printing (QE3) by the Federal Reserve which said it would launch an open-ended  commitment to purchase $40 billion of mortgage-backed securities monthly.


The global benchmark for oil, Brent crude oil, jumped to about $117 a barrel. It maintained its roughly $18 premium to U.S.-based WTI crude oil which was trading at $100 a barrel on a couple days ago. Non-futures investors can easily participate in the oil market through the use of exchange traded funds. The ETF which tracks Brent crude oil futures is the United States Brent Oil Fund (NYSE: BNO) and the ETF which tracks WTI crude oil futures is the United States Oil Fund (NYSE: USO).

The real story behind the story in the oil market, however, is the ongoing Arab Spring which is sweeping throughout the Middle East and North Africa, pushing aside some regimes and threatening others. The countries whose governments, such as Saudi Arabia and the other Gulf states, feel threatened by popular uprisings are where investors should put their focus.

Saudi Arabia in particular is key because it accounts for more three-quarters of the world’s spare oil production capacity. So it is very important to note that the kingdom is no longer a price ‘dove’ in OPEC as it has been for decades. It has joined Iran, Venezuela and others in being a price ‘hawk’.

The reason behind the change in attitude is simple…Arab Spring.

Like its neighbors in the Gulf region, Saudi Arabia has gone on a public spending spree to appease its restless citizens. It has sharply increased outlays on subsidies for items like food, fuel and housing in an attempt to appease its citizens. In 2011, the kingdom raised its domestic spending by $129 billion – the equivalent of more than half its oil revenues.

Much of this increased spending will go toward upgrading the country’s infrastructure. Take electricity, for example. Saudi Arabia has revealed plans to spend more than $100 billion dollars on power plants and distribution networks by 2020. The kingdom has also set a goal to electrify 500,000 new homes that are being built in an attempt to mollify political unrest among its population of 27 million people.

This spending spree led the International Monetary Fund and other analysts to estimate that the kingdom and other Gulf countries need oil to be selling between $80 and $85 a barrel in order for the governments to balance their budgets. This is up, in Saudi Arabia’s case, from a mere $25 a barrel a few short years ago!

Unfortunately for oil consumers, this trend looks set to continue in years ahead. According to the Institute of International Finance, by 2015 the Saudi government will only be able to balance its budget if oil prices are at $115 a barrel if current spending trends remain in place.

So in effect, with the Arab Spring forcing governments to spend more on their citizens, it has put a floor under the price of oil. OPEC will do everything in its power to keep the price above the budget breakeven points for governments in the Gulf region.

If you would like to get my weekly analysis on precious metals

and the board market join my free newsletter at www.TheGoldAndOilGuy.com

By Chris Vermeulen

Chris@TheGoldAndOilGuy.com

Please visit my website for more information. http://www.TheGoldAndOilGuy.com

Chris Vermeulen is Founder of the popular trading site TheGoldAndOilGuy.com.  There he shares his highly successful, low-risk trading method.  For 6 years Chris has been a leader in teaching others to skillfully trade in gold, oil, and silver in both bull and bear markets.  Subscribers to his service depend on Chris' uniquely consistent investment opportunities that carry exceptionally low risk and high return.

This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.


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6 Critical Money Making Rules