Algerian Hostage Crisis Adds to Oil s Reflationary Play

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.