February 24, 2011
Sheraz Mian
Director of Research
Macro uncertainties related to the evolving picture in the oil-rich Middle East are trumping everything else in the market. Rising oil prices, resulting from fears of a supply shock, have topped every other story this week. And we may not have seen the end of this trend — not yet.
Nothing else matters as long as we remain in this mode. Favorable reports about Jobless Claims and Durable-goods orders become just background noise in this oil-fixated environment. Today’s labor market report would have cheered the market a week ago, but those were simpler times, it now appears. Not even earnings reports from the likes of General Motors, Target, Sears and Gap matter.
My sense is that we need to see Moammar Gaddhafi’s back before this trend starts reversing. And reverse it will, because Libya is the first and last major oil producer to get caught up in the democracy wave.
The unspoken fear in the market centers on Saudi Arabia, the linchpin of the global oil markets. The Saudi regime has its vulnerabilities in unemployed youth and a disaffected Shiite minority in the oil-rich Eastern Province. But as yesterday’s roughly $35 billion in new spending plans showed, the Saudi’s have historically proven to be very good at sprinkling their enormous wealth around domestically.
Suffice it to say that the extent of the current fear premium in oil prices is reflecting a worse-than-likely scenario and will come down as the Libyan story settles down.
P.S. What is Zacks Ahead of Wall Street? To find out more about Zacks Ahead of Wall Street, click here.
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