Oil is rallying hard today in Asian trade, up nearly 5% on news that the Saudis have put together a 10-nation coalition to bomb Houthi militia in neighbouring Yemen.
Already this year there have been two major surveys which have tagged “geopolitical risk” as the primary risks for the globe this year. One was the Oliver Wyman survey for Davos and the other was the more recent BoA Merrill Lynch fund managers survey.
This is important because there is nothing more uncertain when it kicks off than geopolitical issues. The Ukraine could have been a real mess but luckily hasn’t been for markets. It’s surely different on the ground and for those whose lives are impacted. But in a market sense, the world got off lightly.
So far, the IS threat in Syria and Iraq has not broadened into a wider regional conflict. That’s meant that oil could keep falling and the global economy, notwithstanding the impact on inflation, could get a tax cut.
The Saudis’ offensive in Yemen will hopefully go the same way.
But John McCarthy, president of the Australian Institute for International Affairs, hinted at the prospect of escalation when he told Reuters today that:
Saudi Arabia is worried that Yemen will become a proxy for Iran, essentially taking control of what had been a Sunni-dominated country congenial to Saudi’s interest. Saudi is looking at Iran’s advances in Iraq and I think they are finding themselves squeezed by a country that they regard as their chief rival for regional dominance. I wouldn’t be surprised to see Saudi ground support at some stage. In the absence of the Americans, who have temporarily quit the field, the Saudis will think they have no choice but to go in pretty hard. We are going to see a redesign of the region.
Wow! Watch this space…
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