Today stock markets are lower, while gold and oil remain stuck to their recent levels seemingly in a consolidation phase as the forex market similarly maintains a quiet USD-positive posture. Oil price, its recent performance, and the implications of the Mid-East turmoil, are in everybody`s thoughts.

Precisely because oil prices are rising so fast (almost 25% in the past three weeks), we believe that the market is overly excited, provided that the turmoil does not spread to Iran and Saudi Arabia, especially the latter. If it does, it is impossible to place a ceiling on oil prices, but we are not inclined to expect this scenario because Iran itself has been very active in monitoring and countering the actions of opposition groups, and also due to the fact that so far the unrest has not extended to Saudi Arabia to a significant degree. Since the unexpected nature of the unrest was one of the major causes of it being so effective in shocking and ousting the dictators, we don`t believe that a similar event can take place in Iran, while in Saudi Arabia the yearning for a liberal democracy is not as strong as many Western analysts believe. On the whole, the Saudis may well see the revolutions as the rest of the Arab World moving closer to their model, as the recently toppled dictatorships were installed as an alternative to the quasi-medieval Saudi model of growth, favoring socialism and modernization over the rule of the ulama and hereditary rule. In Libya, at least, the king and the monarchy are finding a degree of enthusiasm and popularity that must surely make the Saudis pleased, even if it is not high. The calls for a "day of rage" announced on Saudi websites, meanwhile, appear to be the main justification for $200 oil right now, but to us this seems only like a publicity measure since it would be far more suitable and profitable to act without an announcement if the opposition groups really thought that they had any chance of success. Saudi Arabia is unlikely to be toppled by local liberals, in our opinion. 

Returning to oil, there is already ample evidence that inflation in the emerging market world is already close to getting out of control, and we would not be surprised to see some drastic action by the authorities, now that the scare over USD depreciation and demise is out of the headlines. For now, the belief is that the U.S. economy is on course to stage a powerful and long-lasting rally which will remove the need for further QE and allow the dollar to maintain its value against other currencies. While we don`t agree with this assessment (since we favor an overall gradual, but periodically highly volatile, depreciation for the USD) it will grant EM central banks the chance to raise rates to combat domestic problems, curbing demand and probably stopping the oil rally before it gets too extreme.

Markets are momentum-driven, so it is expectable that the oil price will see severe movements and perhaps another record before it is once again in a calm environment. This wouldn`t be of great significance, however, since it is only the consequence of market mechanics, and not necessarily a disruption of supply-demand, unless the dreaded Saudi revolution materializes.