Algerian Hostage Crisis Adds to Oil’s Reflationary Play

<p>The ongoing hostage crisis in Algeria’s highest-producing gas field adds a new element of risk to the oil equation, beyond the familiar “known” fear factors […]</p>

The ongoing hostage crisis in Algeria’s highest-producing gas field adds a new element of risk to the oil equation, beyond the familiar “known” fear factors from Iran, Syria and Libya. The Algerian government’s armed reaction in less than 10 hours to the siege was a firm message to terrorists demanding the freeing of prisoners in Mali and withdrawal of French troops from the Algeria’s southern neighbour. One implication to Algeria’s firm response would be that further terrorists attacks targeting Algerian energy interests are unlikely, since Algeria would neither consider negotiations, much less, fulfill kidnapper’s demands. The situation is highly unlikely to turn into that of Nigeria where rebels’ attacks at refineries and pipelines are a frequent occurrence.

Part of the reason Algeria has so far resisted the spread of the Arab Spring, seen in Tunisia, Egypt, Libya and Syria is that the third largest gas supplier to Europe has had its own civil war in the 1990s. The Algerian governments’ stern reaction is a vocal message aimed at preventing the current events of becoming a tipping point to renewed violence in the Sahel region spreading North near the Capital.

As the risk premium to energy prices is boosted by a new source and global central banks pile on their own reflationary policies, targeting bond yields (ECB), unemployment (Fed) and CPI (BoJ), oil prices are likely to remain supported.

In fact, Brent oil is on its way to break above the $113 trendline resistance before encountering temporary barrier at the September high of $115. As long as the 109.90 trendline survives the weekly closes, brent is slated to break the 115 level and hit the 118.80 target near end of Q1.

After outperforming all 14 commodities in 2011 with a 15% increase, Brent oil was the fourth worst performing commodity in 2012, besting WTI, cotton, sugar and coffee. The combination of geopolitical factors (unknowns becoming more known after the Algerian events) and central bank action is likely to send oil back to the top of commodities’ ranking.

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.