Global markets are being dominated by two unfolding dramas in the last few weeks of the summer. One is the meltdown in emerging markets that we discussed last week. That trend continued to make headlines this week. The other is the unfolding geopolitical crisis in the Middle East, and the accompanying rise inBrent Crude oil prices.
Brent Crude hit a six-month high of $117.34 on Wednesday. Seeing higher oil prices on geopolitical tensions is nothing new, and certainly in the past the fear was that high oil prices were a serious damper on the U.S. economy, but those concerns are a bit overblown this time. Yes, it is still a story of demand and supply with a bit of spice from speculators looking to follow a trend. However, the dynamics surrounding this market are very different this time in two fundamental ways.
First, the supply shortages coming out of the Middle East are a collection of localized disruptions involving both labor strikes and violence. The most significant issues are happening in Libya rather than Syria or even Egypt. However, these are tensions that at some point will ease and the pipes will flow again. The situation in Syria seems to be clearly following a "buy the rumor, sell the fact" pattern – oil prices rise on tensions, but fall as the situation resolves one way or another.
Second, the U.S. is just not as vulnerable to Middle East oil shocks as it used to be due to the development of domestic natural gas. In 2012, the U.S. imported about 40 percent of petroleum products – the lowest level since 1991, and about 38 percent of that 40 percent comes from Canada and Mexico.
My View: While the Middle East is a never-ending source of problems, oil prices are on a temporary spike and not a significant worry to the global economy. I don't believe these elevated prices will stay that high. Market focus will be back on other issues like the U.S. Fed, the debt-ceiling fight in Washington, as well as key events in Europe and Asia.
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