The Return of Geopolitical Risk

One of the more intriguing things about the market period we are living in has been the way Markets have shaken off all manners of risk. I couldn’t tell if it was a sign of strength (resiliency) or weakness (evidence of complacency).

All manner of risky activity has been shrugged off as if it didn’t matter.

We even noted on Monday that Oil and Gas had ticked up in price, with premium (high test) selling for more than $3 and Oil tickiling $64. That obviously didn’t concern Mr. Market last week, nor did the Fed’s evident concern with the decaying economy and creeping Real Estate problems.

Now, it appears that glimmers of recognition of all that risk is returning, courtesy of Iran’s capture of 15 British sailors and marines. Last night, Oil spiked $5, "rumors that Iran fired on U.S. Navy warships." Other rumors of an immiment Iran attack by the Brits aided by the U.S. were reported.

With a little luck, this situation gets resolved with no shots fired,
but I suspect that may not suit the unpopular President of Iran, Mahmoud Ahmadinejad — nothing rallies the populace around an unpopular president like an attack on the nation from abroad.

Oil has backed off from those lofty prices, but it remains over our previously noted resistance level of $64.

Bloomberg is reporting that:

"Oil rose for a seventh day in New
York, climbing close to $65 a barrel, on concern a dispute over
Iran’s capture of British servicemen would escalate, disrupting
supplies from the Middle East.         
      

Oil surged $5 in seven minutes late yesterday on speculation
the U.K. would mount a rescue attempt, and rose today by more than
$2 a barrel. U.S. stockpiles of gasoline were already falling
before the standoff between Britain and Iran, and analysts expect
the Department of Energy to report today they fell again last week,
the seventh straight decline…

Almost a quarter of the world’s oil flows through the Strait
of Hormuz, a narrow waterway between Iran and Oman at the mouth of
the Persian Gulf. Relations between Iran, which sits on the world’s
second-largest proven reserves, and western governments are already
frayed because of the country’s nuclear program."         

I have no idea where Oil will go, but if this situation escalates further, the direction will be higher.  Mike Panzner charts a potential move in Oil up to $77:

Oilbreakout

We may or may not see that type of a move. However,it is increasingly obvious (to me at least) that  Obliviousness may no longer be a rewarding investment posture.

>

Sources:
Oil Rises a Seventh Day, Climbs Near $65 on U.K.-Iran Standoff
Grant Smith
Bloomberg, March 28 2007
http://www.bloomberg.com/apps/news?pid=20601087&sid=aTlE415EaKJM&r

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What's been said:

Discussions found on the web:
  1. Aaron Byrnes commented on Mar 28

    Why did BR link a story about the tragedy of 911 to the text “nothing rallies the populace around an unpopular president like an attack on the nation from abroad?” Using 9-11 to get in a personal swipe in at Pres. Bush is a low blow.

    The Iranians kidnapped the Brits all on their own. Pres. Bush did not fly airplanes into the WTC, that’s unless BR is now becoming a 9-11 conspiracy monger. The two events are not comparable.

    ~~~

    BR: President Bush popularity ratings spiked after 9/11 — thats all I am referencing . . .

    I am not in the camp of conspiracy theorists who believe the WH was behind 9/11 — this is the same group that couldn’t keep the firings of 8 US Attorneys a secret, so I doubt anything as vast as suggested is remotely within their capability

  2. Jim commented on Mar 28

    Aaron stop being so sensitive. Barry is just stating a fact of human nature. How popular was Roosevelt during the depression, not too popular. Of course after the attack on Pearl Harbor things changed.

    The real issue is not what Bush did, it is what he and his Admin did not do. Tell the truth time and time again.

  3. wyler commented on Mar 28

    Please excuse or delete me for off-topic and not meant to raise further conspiracy-theories but I’m curious about the WSJ running this morning — on Bernanke/Joint Economic Committee of Congress day — a page one article Pain From Free Trade Spurs Second Thoughts citing Mr. Blinder’s Shift Spotlights Warnings of Deeper Downside.

    “. . . he made a “guesstimate” that between 42 million and 56 million jobs were “potentially offshorable.” Since then he has been refining those estimates, by painstakingly ranking 817 occupations, as described by the Bureau of Labor Statistics, to identify how likely each is to go overseas. From that, he derives his latest estimate that between 30 million and 40 million jobs are vulnerable.” [Sub. probably required:]

    http://online.wsj.com/article/SB117500805386350446.html?mod=home_whats_news_us

    Sure would like to hear BR’s thoughts on this and the timing — are new trade policies brewing?

  4. Philippe commented on Mar 28

    Mr Paul Kennedy “rise and decline of the great power” is explaining the decline of the great powers throughout the age as the inability to finance the military powers which have been associated to the built up of economic or colonial empires.
    When most of these empires were driven by the access to cheap or cheaper natural resources, the real revolution for these powers is to adapt to the term of trades (industrial goods, technology) against natural resources.

  5. Teddy commented on Mar 28

    I think it should be illegal for corporations to “donate” to political campaigns because these “debts” are due immediately upon the politicians taking office. And when these corporations can cherry pick between Chinese, Indian, and American workers, they are NOT working in the best interests of our country. No other county allows their corporations to pick and choose. And even Japan’s direct investments in this country like Honda and Toyota lead to additions to their current account surpluses since they keep the value added jobs like design and engineering and engine production in Japan and leave American workers the jobs of assembling their parts here in the US.

  6. KP commented on Mar 28

    Aaron that ‘wooshing’ sound you heard was the point of that 911 ref going right over your head.

  7. Bill commented on Mar 28

    I would be interested to know if there is anyone who has/will gone on record regarding how many dollars of geopolitical risk is factored into the price of WTIC — and how that number has varied over time. It would make for a fascinating chart, if anyone would be willing to go out on that particular limb.

  8. Leisa commented on Mar 28

    BR, last year’s crisis du juor was Asian bird flu. Amazing how that evaporated–same risk is still there, it is just not permeated into everyone’s fear index.

  9. lewis commented on Mar 28

    there is a recent article on econobrowser about how US investment investment in foreign countries is essentially earning no more than foreign investment in the United States http://www.econbrowser.com/archives/2007/03/maybe_we_cant_c_1.html . If you aren’t making more on an investment in Venezula, Indonesia or Africa than you are in the US, you should have your head examined closely. That is true risk denial.

    Speaking of having their head examined, Bill “My Bad” Gross is at in his latest column. Explains all the drastic measures we need to take to bring back the real estate asset bubble. Uh, Mr. Mybad, some of don’t think the real estate bubble was a GOOD thing that we need again……..

    Lewis

  10. Michael Schumacher commented on Mar 28

    to further Leisa’s comment I remember when Avon warned and then missed it’s own re-done expectations (this was in late ’04) and the reason??……SARS

    Bird FLu was hot not because of the threat but because of sector “rotation” and the like. I wait, with baited breath, what the next “crisis” will be.

    Ciao
    MS

  11. worth commented on Mar 28

    Weren’t we supposed to be wiped out by a killer asteroid by now or something? Hollywood made not 1 but 2 movies about it at the same time – talk about a slow news year.

  12. ari5000 commented on Mar 28

    this JUST happened when Israel invaded Lebanon.

    History suggests oil rally is nearly over. Every time someone is predicting a rise to $77 or $100 — it’s over.

    Remember in January when OPEC was cutting production due to global warming reducing demand. How much excess supply is out there? How fast can S.A. ramp up barrels for sale at $64?

    Just another bounce in a range-bound market.

    Every crisis is given so much weight by the media.

    Then the U.K. soldiers are released and it’s back to focusing on Anna Nicole’s corpse.

  13. Mr. Bubbles commented on Mar 28

    Anyone who looks closely enough can see what’s really going on here.

    Make no mistake, the Bush administration is planning an attack on Iran at some point before the end of his term. The headlines “British sailors captured” and “Shots fired at U.S. warships” are just a prelude to a Gulf of Tonkin-type incident.
    You heard it here first.

  14. DavidB commented on Mar 28

    As someone who is making his income on estimating risk(unlike the governments who are creating them), I can’t see this Iran situation making an honest impact on the price of oil. It will probably make a dishonest impact but that is the markets right?

    Does Britian have any money left to go toe to toe with a third rate(potentially Chinese or Russian supplied) military power?

    I think this will end in a major loss of face for Britain even though I am of the opinion they may have deliberately provoked an incident in order to drive oil prices up.

    That may not be a likable position but it is what I think is the underlying truth.

    And speaking of oil I have a huge hunch(call it one of those Livermore gut feelings from monitoring the broader market) that high oil prices are need to keep some international cash flow chain going. If oil drops below a certain price I am getting the feeling that something serious might break down in the cash velocity chain somewhere.

    We may see that happen before the year is out after we get the current juvenility out of the way

    JMO

    Fire away where appropriate

  15. Fred commented on Mar 28

    Well, it has been suggested that the spike in overnight oil futes was caused by another “fat finger trade”. This prompted some lies (I mean rumors) about Iran. I suspect the Mouth from Iran will back down shortly…and oil will follow suit.

  16. Blair-Bush’s Lap Dog commented on Mar 28

    Bring back Margaret Thatcher..

    paraphrase from another site:

    Remember when Argentina stepped on pengiun in 1982?…Falkland Islands or as the brits said “fookin islands”. They sent the Navy down there and blew the shit out of that place almost 800 Argentines died and 400? brits.

    For what reason? Argentina had a case of Nationalism and tried to take the heat of it’s own failed military gov’t. by invading some little inconsequential piece of land and stoking that nationalistic fire.

    And now we have Tony Blair “discussing” this recent episode in diplomatic terms. GO in and take care of your soldiers,effing pansy.

    Don’t say it’s a “delicate” situation or whatever. Take care of your people.

  17. Mr. Bubbles commented on Mar 28

    [Don’t say it’s a “delicate” situation or whatever. Take care of your people.]

    This is a PR war, and both Britain and the U.S. want to look like the diplomatic pragmatists here. This is a chess match, and the groundwork needs to be laid…

  18. ArizonaChartist commented on Mar 28

    “GO in and take care of your soldiers,effing pansy.”

    I believe the proper slur is “yellow-toothed pansy”. At least that’s the term I heard making the rounds when the Brits were phoning Americans in Nov ’04 to urge said Americans to vote for Kerry.

  19. Si commented on Mar 28

    Make no mistake, the brits will have a scrap with anyone big or small. However I believe the present administration over there is probably more interested in Barcoding the nations kids or other big brother activites…..so my UK contacts tell me.

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