Of all the traded commodities, oil, or black gold, is the most intriguing. Wars are fought over this commodity, courses of national and international politics change abruptly over oil.
As any oil trader worth his barrel would know, oil prices have three kinds of premium built into it —speculative, political and terror.
Needless to say, political and terror premiums need special skills to gauge.
As an oil trader, I have to monitor Organisation of Petroleum Exporting Countries, or Opec, meetings, International Energy Agency, or IEA, releases, statements of diverse personalities such as Chekib Khelil, Shokri Ghanem, Ramirez and Ali al-Nuaimi.
This is in addition to Somalian pirates, Venezuelan president Hugo Chavez, Libyan leader Muammar Gaddafi, the Nigerian rebels and Russian giant Lukos.
Of course the US non-strategic petroleum reserves impact oil prices too, but only marginally.
Oil remains something of a hippie commodity, wild and volatile.
Now one more personality debuts on the global oil stage — Muqtada al-Sadr.
Oil traders like me are taking notice. Weekend chatrooms are buzzing and so is the beta (volatility) on crude oil.
As per media reports, Muqtada, a firebrand Shia cleric and chief of the feared Mehdi army, is back in Iraq and is gunning for a mainstream political role in future Iraqi elections, even as the US draws a withdrawal plan.
Note his periodic press statements and note how oil markets react in predictable manner. Iraq, by the way, has plans to pump 12 million barrels a day (about 25% of Opec’s total output) by 2012 and be one of the primary ‘oil price swing’ producer nations (capability to significantly impact oil prices by tweaking its output).
Muqtada’s political leanings are heavily tilted towards Iran’s Shi’ite clergy and, therefore, by default, anti-west.
Hehas made no bones about the fact that Iraq must be ruled by Shias (Saddam Hussein was a Sunni), who are a majority and that he is prepared to shoulder the responsibility of a national leader. He has made it even more clear that any Iraqi leader who rules Iraq must (or will) rule with an iron hand. His ideology is hardline and unrelenting.
With the US having had to shoulder the responsibility to oversee and supervise repair / upgrade Iraqi oil wells after the 2003 invasion as Saddam’s Republican Guards set the wells afire, most Iraqi oil wells will have modernised to outperform their peer Arab producers who boast of decades old extraction technology & equipment.
Iraq’s position as a future oil price swing nation is almost assured. Any seasoned oil trader will know that major upgrades to oil wells and extraction hardware can only be achieved after extended shutdowns and loss of revenues.
Opec members are busy falling over themselves in a mad scramble to pump over and above their allocated quota to earn petro dollars.
In the perverse and bizarre world of oil, Opec allocates quotas to member nations not on proven reserves but on claimed reserves!
Naturally, every nation is in a hurry to announce ‘revised reserves’.
While many sanguine voices have expressed concerns about over supplying the market, it takes only one member to exceed the quota to break the price cartel.
I feel a strong personality is maybe what will take the price fixing cartel to succeed, much to the chagrin of the oil consuming world.
That such a person should also command the power of a price swing producer, will be an additional positive.
Muqtada, if he ascends to power, will have all the ingredients at his disposal to be such a personality.
With a high quality crude reserve in Iraqi territory at his disposal, he can potentially brandish the ‘oil sword’ at the western world (‘Oil sword’ was a term coined in 1973 after the Arabs forced an oil embargo on the west in protest against Israel).
While the impact of his actions may appear limited as of now, the permutations and combinations of what may occur when he comes to power are mind-boggling.
That he is close to Iran is a given. That Iran has been attempting to put in place a modern oil bourse is a well known fact. That they want payments to be made in ‘any but the US dollar’ is also well known.
If Muqtada hitches his wagon to Iran’s star, oil can be on the boil again. It can lead to geopolitical stress that will make the Korean imbroglio look like a walk in the park.
Currencies will go into a tizzy and fiscal deficits will soar into the stratosphere. Oil above $120 / barrel levels is any government’s worst nightmare come true.
If Muqtada has his way, these developments are likely to make the coming future challenging for oil consuming / import dependent nations.
Watch the man closely in the coming years.
vijay@BSPLindia.com
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