The Libya Effect

The Libya Effect

The Libya Effect

It does not require a lot of analytical prowess to contemplate the end of the crumbling Libyan regime. They have effectively lost control of the eastern half of the country and are shamelessly relying on the state's military capability to hang onto the rest. The regime in Libya would crumble the moment one or more units of the armed forces, particularly in the capital Tripoli, would refuse to fire on their unarmed citizens. It is not a question of 'if', but 'when' this plays out.

This leaves us with handicapping the extent of the systemic risk to the global economy through question marks about the safety of global oil supplies. The fear premium in oil prices over the last few days was triggered by the situation in Libya, but it goes past this immediate flashpoint. Please don't forget that OPEC has the ability to easily offset lost production from Libya. In fact, OPEC's unused or excess production capacity is more than three times Libya's daily volumes.

The fear premium mostly reflects concerns about the spread of disturbances to other major oil producers, particularly Saudi Arabia. While it's difficult to foresee how this historical movement would unfold in the coming days, but I am more than confident that it would leave the House of Saud largely unaffected. Having said that, the fast unfolding drama in the region would continue to show up in oil prices in the coming days.

The U.S. economy is in much better shape to withstand the oil surge than has been the case in past months. The fourth quarter GDP strength, which will most likely get revised upwards later this week, has continued in the current quarter. The ISM indices, the Philly Fed survey, leading indicators, and even jobless claims all bear this out.

And it is this underlying strength that has been driving the stock market rally. While the Middle East situation may produce a temporary air of tentativeness in the market, its ability to pull the market down in a more enduring fashion is limited.

P.S. What is Zacks Ahead of Wall Street? To find out more about Zacks Ahead of Wall Street, click here.

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