Investment Contrarians

Is the Cold War Heating Up (and How Would it Affect Your Wallet)?

By for Investment Contrarians |

market sentimentHaving been relegated to the history books, the Cold War between the West and the East appears to be heating up again. On one side, we have increasing tensions with China; U.S. politicians claim that China is a currency-manipulator and China has massively increased its spending in defense, which is threatening the security in that part of the world. If we look to the Middle East, tensions are now rising with Russia.

Market sentiment has always been wary of the Middle East in relation to oil prices, partly because of the level of supplies generated within that region, and partly because of the traffic routes for transporting oil around the world. Oil prices are extremely sensitive to any disruption to either supply or transportation routes, as the world is increasingly run on just-in-time deliveries. Any disruption will certainly cause massive spikes in oil prices and volatility in market sentiment.

The recent hostilities between Turkey and Syria are now putting U.S.–Russian relations in the spotlight. Essentially, America is supporting the Syrian rebels and looking to oust their leader, believing this will free the Syrian people of the tyrant. Russia has been a long-term supporter of Syria, and has continued to provide military weapons to suppress the uprising.

In a recent interview in German newspaper Der Spiegel, Vladimir Yukanin, who is a close confidant of Russian President Vladimir Putin, made some remarks that certainly will affect market sentiment. (Source: “Russia and the West are Drifting Apart,” Der Spiegel, October 11, 2012.)

While Yukanin states that there are many common problems between Russia and America, he was extremely critical of U.S. support in the region. He stated that people in the Middle East don’t want to be dominated by Western nations, as he said the failed attempts by the Soviet Union didn’t work; he doesn’t believe promoting democracy in the region will be any better. He also hinted that the West is hypocritical in promoting democracy, as evidenced by U.S. support of Saudi Arabia, which clearly is not a democratic state.

The most worrying statement was his comment, “Russia and the West are drifting apart.” This cannot be seen as helping oil prices remain stable. Market sentiment will continue to be on the edge, as developments in the Middle East shift with each new uprising or revolt.

With such tight supply lines and limited ability for other nations to increase production, oil prices will be at the mercy of any escalation in Middle Eastern violence. While we certainly can’t change anyone’s opinion regarding foreign policy, we can be aware of shifts in market sentiment. I would closely watch any news of increased tensions, as the Turkish–Syrian hostilities could break out into full war. A war between Turkey and Syria could spark a larger regional battle that would be extremely dangerous for oil prices, not to mention an attack on Iran by Israel.

Brent Crude Oil-Spot Price Chart

Chart courtesy of www.StockCharts.com

Brent Crude oil prices are the standard for international markets. The massive volatility in oil prices, which included a bottom in late June, has been followed with a retracement over half of the decline. With oil prices hitting just above their 200-day moving average (MA), we would need to see a break above the high in September for a retest of the year’s highs. Market sentiment is now clearly looking at oil prices to potentially move up if hostilities break out.

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