Editor’s note:
The decline in oil prices has finally gotten the attention of the mainstream media, with some commentators suggesting that a continued collapse in the oil markets is straight ahead. In this analysis, initially published at Joe-duarte.com on September 12, 2006, Dr. Duarte looks at the situation from multiple sides and offers key guidance for investors and traders. This analysis fits well with other aspects of Dr. Duarte’s peak oil articles, especially one from April 2006 titled Peak Oil: The Black Gold Rush. In the second part, titled “Al-Qaeda: Accelerating Pace Of Operations Likely,” Dr. Duarte explores one situation which could lead to a halt in the price of oil.

Is This Really The Big One? (9-12-06)

After a 16% decline in the price of crude oil and a 14% decline in overall commodity prices, as measured by the CRB Index, questions are rising about the status of the secular bull market in commodities.

The fact is that although no one wants to say it, it is possible that we may have seen a long-term top in the price of crude oil. The problem with making any such claims, is that it's nearly impossible to make such assessments without having at last several weeks, and sometimes months worth of evidence.

The top of the dot.com bubble took months to become clearly evident, although the losses were already significant by the time the trend was already established.

The technical evidence at the current time in the oil markets, though, suggests that something is ongoing, as the 200 day moving average, the line that divides long term up trends and down trends is being tested on key major commodity stock indexes, as well as futures contracts.

For example, stocks like Halliburton and Schlumberger (see our Market Moves section below) have been in major and very aggressive down trends for some time.

Both are key components of the Philadelphia Oil Service Index (OSX, see chart below in our oil and energy section), which has collapsed over the last few days.

Gold prices have also taken a hit recently, with the $600 area now being tested, and breached on 9-11, although prices rose back above the key benchmark overnight.

There are many reasons for a significant pull back in commodities.

First, oil prices have been on the rise since the 9/11 attack in 2001, with nearly a non-stop bull run during the period.

Second, the Federal Reserve has raised interest rates four fold over the last several years after taking the Fed Funds to 1% after the 9/11 attacks.

And third, there are now clear signs that the U.S. economy is starting to slow down, as housing prices fall, and thus the borrowing power of home equity is starting to fade.

Not So Fast

Still, the bears should not be dancing in the streets just yet, as little has changed in the supply equation for oil, which is the centerpiece of the commodity equation.

Aside from the discovery of new fields, such as the Jack find in the Gulf of Mexico, and the expectations of new refinery capacity coming overseas, little has changed in the U.S.

The Gulf of Mexico is still vulnerable to natural disasters. Political pressures still make in nearly impossible to build a refinery in the U.S. And investment in alternative energy remains significantly below what it should be.

In other words, the decline in oil, and thus commodity prices, at this point, is more due to a fall in demand, than to an oversupply.

The key to commodities, is supply. Only when supply is so overwhelming that it can swamp the most robust demand, do you get an end to secular bull markets.

Conclusion

What's our point?

It's hard to argue with the charts. Thus, as traders, we go with the trend, which at this point favors the bears. See our commodity section for recommendations.

Yet, it's also important to remember that commodity markets can swing on a dime, a whim, or even a series of sudden developments.

Hurricanes, earthquakes, terrorist attacks, and even political maneuvers can lead to significant trend reversals.

Still, the fact is that the consensus is that oil prices will stay high forever, which is usually the sign that indeed a trend is vulnerable.

We will likely know how this turns out in the next few weeks, when the first freeze hits, or in the unfortunate event of a major hurricane hitting the Gulf of Mexico.

Al Qaeda: Accelerating Pace Of Operations Likely (9-15-06)

Al Qaeda's pace of operations is likely to increase in the next few months, as the organization is finding a need to prove its ability to deliver on its threats, say two intelligence services.

According to Debka.com, Al Qaeda is in the process of preparing for a major assault in Lebanon, targeting Israeli and Unifil forces.

Stratfor.com concludes that recently foiled attempts by Al Qaeda to attack oil installations in Yemen are also significant.

Lebanon

Debka, citing Western and Lebanese intelligence sources, reported: "al Qaeda has named veteran Abu Rush al-Miqati, 56, an old Middle East hand, to organize the attack. Lebanese interior minister Ahmad Fatfat reports 13 al Qaeda cells are operating in Lebanon and are being mustered for the attack."

Al Qaeda has two major targets in Lebanon, Italian and French troops, both taking part in the U.N. force setting up shop to enforce the cease fire between Israel and Lebanon.

According to Debka, 'French sources report that a new message was posted on Islamist websites by Deputy al-Qaeda leader Ayman al-Zawahiri, calling on a militant Algerian Islamist group to target France. In a taped recording Zawahiri called on the Algerian GSPC group to become "a bone in the throat of the American and French crusaders". '

Zawahiri 'also urged the GSPC - the Salafist Group for Preaching and Combat - to sow fear "in the hearts of the traitors and the apostate sons of France" and to crush the "pillars of the Crusader alliance". Prime minister Dominique de Villepain advises treating this warning with the greatest seriousness. France must prepare for the worst, he said.

Yemen

Stratfor.com reported: "Yemen's official SABA news agency reported Sept. 15 that the country's security forces foiled two attacks 35 minutes apart against energy-related facilities; four suicide bombers and one security guard died in the attacks."

According to the intelligence service, citing the report: "the first attack targeted the oil exporting port in the Dhabah area in the Hadhramout region while the second targeted an oil refinery and gas producing unit in the Marib area. In both incidents, explosives-laden vehicles were destroyed by guards before they reached their targets. The Yemeni government has notably beefed up security since 2003 to protect its oil installations, with the bulk of security measures concentrated at the Aden and Hodeidah ports."

Stratfor concludes that the failure of the attacks, which were foiled before the targets were struck, is a sign of both weakness, and a renewed willingness to attack by Al Qaeda.

Yet, the key is that Al Qaeda continues to show interest in attacking oil installations.

Stratfor notes that Yemen is not a particularly important oil target with regard to the global energy markets. Yet, an attack on Yemen would have significant implications for Yemen, since "Yemen is highly dependent on its oil revenues, which make up about 65-70 percent of the Yemen's GDP. Striking at the oil facilities helps al Qaeda to follow through on its vow to strike oil installations in the Gulf, while at the same time aiming to destabilize the government ahead of the Sept. 20 presidential elections."

Conclusion

Al Qaeda is looking to expand its base of operations beyond Iraq.

The results of recent attacks, have been relatively unsuccessful. Note the lack of major damage to the U.S. embassy in Syria, as well as the lack of a major hit in Yemen.

Still, there is a clear pattern evolving, and it is important to explore it fully.

1. Al Qaeda remains an active threat.

2. The level of quality of its operatives seems to have diminished of late, given their low success rate.

3. There are some reports that Al Qaeda is feeling pressure to outdo Hezbollah's recent activity in Lebanon, which is still being marketed in jihadist circles as a success, despite Hezbollah's own public admission that it was by no means a success, and that they were surprised at the strength of the response from Israel, and the political fallout in Lebanon.

Yet, the fact is that the pace of attacks is starting to pick up. As Stratfor puts it: "The attacks and the one attempted against the U.S. Embassy in Syria on Sept. 12 may have been foiled but they could just be part of a wave of additional attacks to come, some of which could be deadlier and more devastating if they successfully strike at an energy-related facility in one of the major oil producing states in the Gulf, such as Saudi Arabia, Kuwait, Qatar and the United Arab Emirates."

In other words, despite calls for a complete collapse in oil prices, if Al Qaeda has one success, even if it is relatively minor, against an oil installation, the oil market's conclusion that there is little threat to prices from terrorism will have to be re-evaluated. Most likely, from a price standpoint, the re-evaluation will be most unpleasant, for consumers, oil companies, and short sellers.

© 2006 Joe Duarte, M.D.
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