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.