When Muammar Qaddafi decided to go to war last week against the common (gun-toting) folk of his oil oasis homeland of Libya, we wonder if he considered the possibility of a NATO invasion.
Not likely, we say, since the popular unrest that swept the Arab world this last month was hardly met with a scrap of tin rattling, let alone any sabres, in the West.
The Iranian government's brutal crackdown against activists last year also barely registered in Washington and London. Just the usual stern faces mouthing the usual canards about democracy and freedom, but in the end nobody really giving a hoot.
Plainly, Iran had too big an armed force, was in the process of acquiring nuclear weapons, and a showdown of that stature for the sake of a few beatings, a round of torture, some deaths and a whole lot of intimidation didn't seem worthy of a potentially new Iraq.
So why the change in policy? Why the change of heart?
Likely, Libya is considered beatable. Like Iran, they have oil (a prerequisite for war), but a smaller standing armed force and a larger proportion of (gun toting) dissenters bubbling within.
In North Africa, the prospect of a drawn out civil conflict that might endanger pipeline and refinery infrastructure and keep oil levitating for an unknown period, was too much for Western democracies to countenance. So when Libya decided to take out its own oil installations, the message had to be sent.
Against the backdrop of 'atrocities' and '10,000 dead' and whatever else the State Department could drum up for media consumption, the U.S., England and possibly France and Italy are now preparing Operation Torch II, a replay of the 1942 invasion that drove the Nazi Wehrmacht from North Africa.
A no-fly zone is in the works. Swat the dictator
No flies? In the bleedin' desert?
Yes, the leaders of the Western world can be a cynical lot, pressing for military action for reasons other than justice, civility and the love of freedom we all cherish. The prospect of $150 oil – or worse – also happens to be tough on incumbents facing an election.
Green Light to OPEC to use Deadly Force
The NATO naval forces that had been sailing in the Persian Gulf before the decision was made to move on Qaddafi are now sending a clear message to all the major oil producers in the ME. Do whatever is necessary to maintain the flow of oil. Do nothing to harm the infrastructure.
That's how the message will be read in Tehran and Riyadh, in any event. Look for heavy hands across the region. And an all-out effort to keep the tar jars filling.
What to trade?
In the meantime, as talk of a Libyan action intensifies, and a potential D-day draws nearer, we expect the price of oil to return to trend. Take a look here. It's NYMEX crude for the last six months:
After gapping higher two weeks ago, the price is now clearly too far above its 50 day moving average to be sustained. Only two things can happen. Either the price will drop down to the 50 DMA or will consolidate at current levels until the moving average can catch up.
The way we see it, the gap in the mid-90's looks ripe for a fill. A PUT option on the April contract might be a timely play.
Or you might consider the following.
One of the companies most affected by the Middle East chaos is Eni SpA (NYSE:E), an Italian oil and gas major with a market cap of nearly $90 billion and huge exposure to Libya, Algeria, Egypt, Yemen and Bahrain.
Here's the company chart for the last year:
Eni's stock appreciated in line with all the majors as the price of crude climbed this year, soaring 25% in just the last three months (see red trend channel, above).
But note, too, that the stock took a wallop when Colonel Qaddafi started destroying oil assets. Current price action is below the short term moving average and both RSI and MACD are weak – especially considering crude's current $100+ position.
Look for worried Italians to start selling this stock before the moment of truth arrives.
And remember, too, that if Western pressure proves too great for the former soldier turned ruthless dictator and profiteer, he just might continue with his wanton destruction of Libya's oil assets.
That'd show 'em.
Many happy returns,
Matt McAbby, Senior Analyst, Oakshire Financial
