The oil price – a yardstick for political risk

Without wishing to trivialise Australia’s recent political turmoil over the leadership of the incumbent government, we have precious little to worry about compared to other states.

The carnage and atrocities occurring daily in Syria will not be fixed by a meaningless referendum while government tanks are blasting thousands of its own people to smithereens.

And while a shot in anger is yet to be fired around the Strait of Hormuz where the US Navy is rapidly building up its considerable muscle, the broader concern about a nuclear conflagration – initiated by Iran, if you believe all western press – is also yet to be proven.

The United Nations’ effort to impose economic sanctions on Iran for allegedly overdoing the uranium  cooking process and thus being accused of building its own nuclear bomb, has fallen flat on its face as China and Russia refused to comply. Even so, Iran has been buying a huge amount of wheat recently, mainly because its crop this year has been shrunk by dry weather. Is Iran stocking the cupboard in case the sanctions do eventuate?

Iran supposedly has a nuclear weapons program underway deep beneath its streets. Its nuclear scientists are finding getting to work a little tough these days, thanks to Mossad.

Preventing anyone from doing business with Iran by shutting the financial windows has certainly caused difficulties for Asian countries who buy quite a lot of oil from Iran.

Iran’s nuclear ambition is a function of its regime, not of its people. President Ahmadinejad may be as mad as a Queensland croc, but its people are not.

But political risk is a two-way street.

No-one much cares or questions Israel’s massive military regime that includes nuclear capability, but they should. When did the media last examine Pakistan and India’s nuclear stash, particularly since the latter is not an assignee of the Nuclear Non-Proliferation Treaty?

And of Pakistan, did the US military not just recently pay a flying visit last year without passports and clearing customs before clandestinely knocking off Osama bin Laden in his holiday home?

If and when the bullets and bombs do start pinging around Tehran, pay closer attention to the manufacturers that supply the munitions as many of them will have begun life in the UK or the US (British Aerospace, Raytheon, Honeywell, Lockheed Martin, BAE Systems and so on).

Don’t forget that when George W. Bush went into Iraq to tidy up what his father started, it was under the pretence of some dodgy information about weapons of mass destruction. Ten years on and more than 100,000 dead Iraqis later, the US has finally taken most of their own weapons of mass destruction home with them.

Earlier this year, the US Secretary of Defence was warning us that ‘Israel may strike first’.

Is there a pattern here?

Much of the global political risk is measured in the one truly global commodity – oil. The First and Second World Wars were intricately enmeshed with the use and supply of oil. When Churchill converted the British navy to oil from coal in the First World War, it proved decisive given the speed and efficiency advantage. Germany and Japan effectively lost WWII because they literally ran out of the stuff.

Now, it is still the most reliable and flexible of all metrics that tells us about global economic and political risks.

For the moment, the oil price is telling us to be concerned about the tension in Israel, Syria and Iran. It says less about the poor economic performance in Europe or the recovery of the US economy which is fortuitously becoming less dependent on Middle East oil.

The question is - what is the source of the geopolitical risk? Tehran and Damascus or Washington and Tel Aviv?

The political risk in Canberra looks manageable in comparison.

Resistance is indicated at the 1370 region in the near term, and no doubt looks top-heavy. Moreover, the overbought RSI is indicative of an exhaustion of the upside. Thus, we would expect a short term corrective phase to eventuate, once our target zone is reached.

Downside support is located at the long term uptrend line and horizontal support level at 1300/1292.

A bearish triple top formed at the 4,307 region has resulted in prices declining during trade on Monday. In the near term, we would expect the local bourse to continue to trade lower, targeting the 61.8%/78.6% Fibonacci retracement region (4222/4199).

Broader term, we remain bullish, targeting the 4,417.60 level. This key level is made up of the 127.2% Fibonacci extension (red Fibs), and the completion of a bullish AB=CD pattern.

After consolidating for the past two week below the 78.6% Fibonacci retracement (red Fibs) at US$1,743, prices have finally broken to the upside. Initial resistance is located at the November 2011 high of US$1,802.92.

Broader term, a weekly close above the 78.6% Fibonacci retracement of US$1,743, would activate the next longer term target towards US$1,879.08.