The growing risk of civil war in the Middle East oil patch is very likely to mean a quick end to a U.S. recovery, warns David Kotok, chairman and chief investment officer at Cumberland Advisors.
Whatever happens, it will be protracted, messy, and bad for the United States, which is in no position to manage rapidly escalating energy costs, Kotok warns.
“Our U.S. ETF accounts are in the highest cash position they have seen in over two years. We think being fully invested when there is a shooting war in a major oil producing country is folly,” Kotok told his clients in a note.
Libyans stand atop an army tank.
The only position in which they will stay “overweight” is energy, Kotok says.
Geopolitical risk is the big unknown here, Kotok explains. China is evacuating thousands of workers.
“We are watching a ‘sea change’ occur among one-tenth of the world’s population and among the world’s low cost marginal producers of the world’s energy. Scenarios with benign outcomes and peaceful transitions appear remote,” he says.
A one-cent increase in the price of gasoline is a “tax” on consumers of $1.2 billion, Kotok points out. Since a dollar rise in the barrel price means a 2.5 cent increase in gasoline, expect gas to cost between $4 and $5 soon, he warns, on top of already rising food prices.
That could lead to a third round of easing by the Federal Reserve, Kotok suggests.
Saudi Arabia is in talks with oil companies to increase production to offset any lost supply due to the Libyan chaos, according to a Financial Times report.
“You can only expect the price to go up. It is fear of the unknown. The risks are all to the upside,” an unidentified oil trader told the U.K. daily. “Saudi Arabia needs to respond.”
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