Diamond A Energy (fka DAECE)

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Deadly Desert Storm??

Compliments of CBS Market Watch


Is a deadly desert storm approaching?
Commentary: Investor perils growing in Middle East
By Joe Duarte
Last Update: 11:20 AM ET Sept. 3, 2002



NEW YORK (CBS.MW) -- The shifting sands of the Middle East are about to whip up into a sandstorm with widespread implications.
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A potentially dangerous story is emerging as the increasingly aggressive rhetorical hard line being taken by the U.S. against Iraq, Iran, and Al-Qaeda is occurring at the same time as an important story is developing in Afghanistan.

Since Vice President Cheney's recent speeches in which he carefully detailed the reasons for the U.S. needing a "preemptive strike" against Iraq, a series of chilling, and very focused articles have appeared in the Washington Post, as well as the extremely prescient Internet Intelligence service Stratfor.com.

The war drums are beating louder, as the Washington Post quoted the Bush administration as calling Iran's "harboring of senior Al-Qaeda members 'unacceptable," referring to reports that Iranian hotels are being used to shelter key Al-Qaeda personnel and that the Bush Administration has "no objection" to Secretary of Defense Donald Rumsfeld testifying before Congress on U.S. preparedness for a war against Iraq.

The Financial Times reported that the head of the U.N. mission in Afghanistan warned the U.S. on Aug. 28 about rising anger against U.S. troops in the country, after mass graves were discovered near a prison run by the Northern Alliance were discovered. It has been alleged that there were prisoners in the grave that were allegedly "murdered" by the Northern Alliance.

Thus, as the September 11 anniversary approaches, the U.S. may be facing a very tangible, surprising and increasingly dangerous situation in Afghanistan, as public and local military opinion is reportedly turning against the U.S. military, while there is evidence that Al-Qaeda is mobilizing its forces.

These developments put the recent turn in OPEC's public comments into more focus, and suggest that there is increasing buzz among its members about a potential increase in terrorist activity against the U.S., and thus the potential for price instability in the oil markets. The cartel, up to a few weeks ago, was unified in its purported wish to keep oil supplies tight and despite decreasing demand around the world, thus keeping oil prices at levels within their prescribed band of $26-28 per barrel. But the truth is that there has been both slack demand and adequate supplies, thanks to slow world economies, to OPEC's cheating on its self imposed quotas, and aggressive production from non OPEC countries.

But over the last few days, despite the fact that there has been no appreciable change in the supply and demand scenario, OPEC has made a point to tell anyone who will listen that if the U.S. attacks Iraq, the cartel will make up any shortfall created by any supply disruption.

And yet, due to the threat of war, crude oil has remained near the top if its recent trading range, with a one-day rise above $30.

The big question, then other than OPEC's self-interest, is why the sudden turn?

The answer may well be that OPEC is aware of an event that is imminent, and thus is covering itself by turning benign in its rhetoric prior to the developments. According to Stratfor.com, Reuters received a communiqué from an Arab magazine editor who has close ties to Al-Qaeda. The communiqué can be summarized as follows: Al-Qaeda and the Taliban have regrouped, and recovered their prior strength inside Afghanistan and Pakistan. Both groups have made it known that they are about to unleash assassinations and guerrilla warfare against the U.S.

And perhaps most troubling is Stratfor's assertion that they have received reports that the fighting against the U.S. inside Afghanistan is worse than has been reported by the U.S. media. Also disturbing is the report, again by Stratfor, that U.S. bases have reportedly been infiltrated by Al-Qaeda, and that opposition to the U.S. is beginning to rise in Afghanistan in areas beyond the capital, and is being joined by non Al-Qaeda and Taliban forces, making the theater increasingly dangerous to U.S. forces. Historians will note that this is the same kind of situation that forced Russia's defeat and exit from the area.

The longer-term political possibilities are grim, and it remains to be seen what will happen if the U.S. is forced into a Russia like situation in Afghanistan. But with the markets already in retreat mode, it is not hard to figure out what the short-term trend is likely to do once the Stratfor.com report, and the Washington Post articles make the Wall Street buzz mill. Even worse could be the situation if indeed the reports are ignored, and a very nasty set of developments begins to take shape in Afghanistan, culminating in a sudden increase in activity and destruction.

The Washington Post, Aug. 29, also reports that a U.N. report concluded that Al-Qaeda's finances are "fit and well," and that the group is poised to strike at any time.

The Post reports that the group's finances are nearly impossible to track since most of their assets have been switched to gold and precious gems, and blames "lax" European compliance with U.N. surveillance resolutions as a significant impairment to the international effort to find, and neutralize the organization's finances. Both Switzerland and Luxembourg have "released" previously frozen assets of potentially linked organizations due to "legal constraints" and "hardship."

Both the S&P 500 ($SPX: news, chart, profile) and the Nasdaq Composite ($COMPQ: news, chart, profile) had broken below the key support of their 50 day moving averages as of Aug. 28, with the odds rising of further downside trouble, if the charts are any indication.

With thin markets and hair triggered inexperienced traders manning the desks while the senior partners vacation in the dog days of August, the markets are very vulnerable to seemingly rising event risk.

What's the bottom line? With U.S. and global markets becoming increasingly testy, the potential for further gains in the short to intermediate term has been decreased significantly. The good news may well be that if this market does break down once again and successfully tests the recent lows, we may finally see true capitulation and a long term buying opportunity emerge. However, a significant break below S&P 500 775, would be a disastrous event, as there is little chart support until the 678 area.

Joe Duarte M.D. is the author of "Successful Energy Sector Investing." His daily market commentary and stock picks can be found at http://www.joe-duarte.com/.









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