JP Morgan sponsored a conference call today on the current situation in the Middle East. The call was in four parts by four different speakers. Key takeaways include:
- Crude oil volatility may last months, not days, as the threat of contagion events in the region persists.
- Saudis are pumping extra crude to make up for the lack of supply from Libya.
- Most major economies are much more concerned about growth than inflation, and will likely not tighten even with the threat of higher prices.
I recommend staying the course in client portfolios, and continue to view the pullback as a buying opportunity unless/until conditions deteriorate.
Full notes follow (thanks to Nathan Dutzmann for being on the call).
Part 1. Joyce Chang, financial specialist
- Too early to change procyclical forecast of 4.0% global GDP growth.
- Emerging market policymakers are focused on growth and social stability rather than inflation, and will only tighten very cautiously.
EM fixed income indices are not much affected by the geopolitical crises.
- JPM still thinks 5-8% EM fixed income gains are possible this year.
U.S. high-grade and high-yield credit not much affected by the crisis
- Inflows have been strong, even this week.
Part 2. Brahim Razgallah, MENA geopolitical specialist
Next likely regime overthrow candidate is Yemen.
- Situation similar to Libya in terms of overall oppression, high unemployment, and violent response to protesters.
- If Yemen’s regime falls, a political vacuum is likely, which could add instability to the region.
- Low probability of regime change in Bahrain, but high odds of negotiation with opposition parties leading to substantive changes.
UAE and Qatar are unlikely to have crises, but some financing contagion risk exists.
- Financing contagion would be a big deal for Dubai, which has and needs tons of debt financing.
Part 3. Matthew Levitt, terrorism expert
Arguably, the events of the past few weeks help delegitimize terrorist groups.
- Accomplished regime overhaul in a few days, when terrorists couldn’t do so through years of activity.
- Typical pattern: Unity of opposition during overthrow; sharp splits during government formation.
- Oil supply concerns go beyond days and weeks; could be months or years of disruption in some cases.
Saudis could send forces into Bahrain if they perceive a risk of Bahrain being pulled into Iran’s orbit.
- Appears to be low risk at present.
- Still, Saudis were disappointed that Bahrain pulled back from violently putting down the protests.
The Saudi government is talented at buying stability.
- The only risky region for them is the oil-rich, Shia-dominated east.
The United States has limited leverage in this situation.
- No-fly zone in Libya may be on the table.
- If we don’t respond when Qaddafi is strafing protesters with gunfire from helicopters, it’s hard to imagine a level of oppression that would be sufficient for us to respond.
- International financial response has been strong, preventing former officials from stealing money from Egypt, Tunisia, etc.
Part 4. Lawrence Eagles, oil expert
Oil market late to wake up to risks, but now very volatile.
- Recent low volatility was unrealistic given the geopolitical situation.
- Conversely, sudden extremes may be an overreaction.
- There is a need to take stock of actual risks, and probabilities of various outcomes.
Libya oil outage likely to last months, but the loss is finite.
- Saudis are selling oil from storage, offsetting losses.
We may not see another contagion event.
- Moderating risk plus new supply would lead oil prices down.
- Initial dip would meet resistance from nervous buyers.
- Longer-term lack of contagion could lead to lower prices much closer to recent historical levels.
The OECD will be very concerned about higher energy prices’ effect on global growth.
- Very worried about return to recession.