Thought you would enjoy this commentary-
What those pundits seemed to miss was the reason that oil was spiking so sharply. The reason that seemed apparent (at
least on the floor) was a series of rumors about Saudi Arabia.
In the Consensus section of Tuesday’s Comments, we noted that traders were concerned about a sharp selloff in Saudi
Arabian Indices. The selloff itself became the topic of one of the early rumors. Some suggested that the pronounced
weakness was the result of wealthy Saudis pulling money out of the markets to secure it against potential looming unrest.
Another rumor that popped up was that the Saudis were sending tanks into neighboring Bahrain to shore up a fellow
Sunni monarchy. A somewhat lesser rumor on the same topic was that the alleged tanks had only been sent as far as the
causeway that marks the border with Bahrain.
Somewhat later another rumor said that the Saudis had imprisoned a noted Shiite cleric who had called for a shift to a
limited constitutional monarchy to replace the current monarchy in Saudi Arabia. When the press seemed to confirm the
arrest of the cleric, oil spiked higher still sending stocks even lower.
By end of day, the Saudi rumors and concerns (and their effect on oil) trumped things like a better ISM number and the
Bernanke testimony. The oil influence is most evident in the drubbing taken by the Transports and cyclical stocks. The
result was another rather ugly Distribution Day.
The Saudi Cauldron – It was not just markets and traders who saw the implications of new pressures on Saudi Arabia.
Here is an insightful summary of the situation from the very savvy George Friedman at Stratfor:
Ever since popular risings toppled the Tunisian and Egyptian presidents, the Saudis have worried about the
potential for unrest within the kingdom’s borders. But when street demonstrations erupted in neighboring
Bahrain, the Saudi kingdom became even more concerned because Bahrain’s opposition consists largely of the
country’s 70 percent Shiite majority.
Terrified at the prospect of empowerment of the Bahraini Shia, Riyadh has been closely working with Manama to
contain the unrest. The Saudis fear that any gains made by the Bahraini Shia could energize the kingdom’s Shiite
minority (estimated at 20 percent of the population, concentrated in the oil-rich Eastern province and linked to
Bahrain via a causeway). The arrest of the Saudi Shiite cleric, however, could accelerate matters. The world’s
largest exporter of crude could experience unrest even before the Bahraini Shia are able to extract concessions
from their minority Sunni rulers.
Compounding matters for the Saudis is the fact that this is not just a sectarian rising. There are a great many
Sunnis within the kingdom who desire political reforms. Such demands create problems for al-Saud at a time
when the royal family is reaching a historic impasse due to an aging leadership.
Between the need to manage the transition, contain the general calls for political reforms, and deal with a restive
Shiite population, the Saudi kingdom becomes vulnerable to its archrival, Iran, which is looking at the regional
unrest as an opportunity to project power across the Persian Gulf. Even if there had been no outbreak of public
agitation, Arabian Peninsula leaders were gravely concerned about a rising Iran. From the Saudis’ point of view,
the 2011 withdrawal of American forces from Iraq will leave them exposed to an assertive Iran.
But now domestic turmoil, especially one involving Shia, only exacerbates matters for the Saudis. Political reforms
in the kingdom threaten the Saudis’ historic hold on power. But any such reforms also translate into enhanced
status of the minority Shiite population, which in turn means more room for Iran’s potential maneuvers.
The Saudis are thus facing a predicament in which pressures to effect change on the domestic level have serious
geopolitical implications.
