Back in early 2008, my wife and I traveled to the Moroccan cities of Marrakesh, Casablanca, drove around the smaller towns of Tinghir, Merzouga, Ouarzazarte, visited Kasbahs and spent the night in the Sahara Desert. Whether it be the most trivial things or the complicated mathematical equations that make me want to scratch my head and say "I don't get it", curiosity has always aided me in my endless desire to learn and discover. For the curious minds and souls out there, these images should at least get those inquisitive minds going:
Behind the beautiful sights, sounds and tastes that this region has to offer, it is an undeniable fact that most countries within North Africa and the Middle East are governed by autocratic regimes.
On January 14 2011, Tunisian President Zine El Abidine Ben Ali was toppled. Less than 1 month later on February 11, President Mubarak of Egypt was forced to stepped down from an office he occupied from 1981. The idea of Middle Eastern autocracies falling one by one gained momentum as the occurrence of protests across the region increased. The countries with ongoing protests getting the biggest air time recently are Libya and Bahrain. To put things in perspective, here is a map of the region.
Most of the stock ideas obviously revolve around oil and as gas as this region lies in the heart of exploration and production of these two vital commodities. Here's a map of the oil and gas pipelines in the region. As you can see, numerous oil and gas pipelines run through the different countries if this region. Oil and gas flows to the various North African, Middle Eastern and Southern European countries. Furthermore, these commodities are loaded onto ships that pass through the Suez Canal en route to its final delivery point. Had the Suez Canal been required to shut down due to the events in Egypt, crude oil prices would have gone up much more. More in depth analysis of what I had just said are discussed on the webinar.
As for Libya, much has been talked about in the media that it's of more importance due to the fact that it actually produces more crude oil than Egypt or Tunisia. However, you will see below that Libya accounts for a small percentage of OPEC oil reserves. In my opinion, the talk of supply disruptions being a major problem is being hyped. What I do believe is a major factor in oil prices spiking is the threat that one by one, the dominoes will fall and ultimately protests will make its way to Riyadh and the rest of Saudi Arabia.
The root causes of the protests and uprisings is difficult to identify given that different ground conditions persist across individual countries and as the saying goes all politics is local. There are however some common themes:
-Autocratic regimes
-Young Median Age Population
-Educated Population measured by Adult Literacy Rates
-High unemployment rates
-Low GDP per capita
-Low Corruption Perception Index Score
-Rising Food Prices
I have previously thought that the oil rich Gulf States would be immune to these protests as the population don't face problematic GDP per capita that Egypt, Tunisia and to a lesser extent Libya faces. However, events in Bahrain have made me rethink my thesis despite this Huffington Post article by Mr. Carmon stating that the events within Bahrain pertain more to religious ordeals. When you have these factors occurring almost simultaneously, it is a matter of when these protests and uprisings occur, not if.
Which country is next in line to experience these internal struggles? You can view the links to the common themes and see that the governments of Algeria, Jordania, Oman, Syria and Yemen are on the hot seat. The biggest kid on the block is of course Saudi Arabia. For now, it doesn't appear that the Saudi regime is in danger of losing its authority. We will just have to wait and see.
At the end of the day, I am a trader and would like to put on plays that could turn out to be profitable. Aside from the plays mentioned on the webinar, I am listing a few more ideas below:
EWI-Italy ETF with large exposure to Libya
Oil exploration and production companies with exposure to Libya according to Oppenheimer:
COP E HES MRO OXY REP ACM - has a $500M 5 year infrastructure contract with the Libyan government
Prolonged elevated oil prices are negative for any fragile economy wanting to grow. Various industries are affected as oil and gasoline are inputs to production and thus affect different segments of an economy. Directly hit are the following industries and some of the common names to look out for:
-Refiners: margins/crack spreads are inversely affected by high crude oil prices
-SUN TSO VLO WNR
-Shipping companies who rely on fuel and oil products to transport goods
-FDX UPS
-Airlines
-ALK AMR CEA CPA DAL GOL HA JBLU LCC LFL LUV TAM UAL ZNH
-Chemical companies: petroleum products are key ingredients in the production of plastics
-DD DOW EMN LYB ROC
For futures and mean reversion traders, trading the Brent and WTI spread to narrow 2-3 months out could be something that interest you. This chart below shows the spread between the Brent and WTI crude for the past 12 months(as of 2/22/2011).
US and Canadian based oil and gas companies levered to exploration and production should also benefit.(Please do your own due diligence as some of these names might have exposure in the region.)
CLR CNQ CVE DBLE SU WLL
***Data and information gathered from theodora.com, theflyonthewall.com, CIA World Factbook 2009, EIU's Democracy Index 2010, World Ban's World Development Indicators, Transparency International's 2010 Corruption Perception Index, UN's Food & Agricultural Organization, Google Public Data and Wikimedia Commons Authors SalonenA, Joeyramoney and Jolly Janner
