JEDDAH: Very recent dramatic events in Japan and the Middle East/North Africa region just make the scenario of a consolidation in global recovery and a return to a more widespread preference for risky assets more uncertain, Credit Agricole Corporate & Investment Bank said Sunday in its latest Economics Quarterly report. Uncertainty could last longer than expected with an obvious implications for oil prices, which would stay higher for longer than initially expected. The ratio of oil expenses to global GDP above 4 percent (the world is around this level currently) has historically been a sign of economic hardship. In the current complex global environment, the search for simple issues, offering clear and immediate translation into portfolio allocation, is no doubt somewhat in vain. Growth prospects are perhaps less of an issue than the return of country risk, the pace of debt reduction or changes in policy. For any investor, It is vital to remain nimble, and liquidity has a value that is no doubt higher than its mere remuneration. Only a few months ago, there was the idea in the market that visibility was improving. Global growth was forecast to come in at 4.5 percent this year and next. Growth should be driven by the emerging countries, of course (+6.5 percent), but the US would also come out of it well, with growth at around 3 percent. OPEC heavyweights have started to increase production, more than offsetting the 1mbd of Libyan production losses. Assuming that Libya will progressively return to full production in April, we expect Dtd. Brent prices to return to $85/bl in the coming months, after their incursion close to $120/bl in Q111. Saudi Arabia is believed to have pushed output to close to 9.4mbd in March, a 700kbd increase compared with end-January levels. Kuwait and the UAE are also raising output. At this stage two broad scenarios are emerging. The first is that the Libyan uprising degenerates into a long civil war, putting oil installations at risk and leading to lengthy disruptions to oil supplies and exports. Under this scenario, oil could remain above $100/bl for the next six months, and the impact of the subsequent oil price shock would rebalance oil supply/demand in the second half of the year. In an alternative scenario the Libya conflict ends with no destruction to oil installations, and production could resume at close to normal levels in April. As a result, markets would likely be oversupplied in Q211, as additional production from OPEC and Libya will face low demand. Under this scenario – the base case – prices are expected to sharply correct in Q211. Contagion spreading to more oil-producing countries in the Gulf is also helping to support prices. There is no necessary causality from a popular uprising to oil supply disruption, but unrest would increase the risk of disruption and introduce a 'risk premium' on prices. This 'risk premium' reflects the fact that operators in the oil chain want to hold higher stocks to offset any potential disruption to supplies. They bid oil higher, pushing prices above levels that would clear supply and demand, thereby allowing the building-up of stocks. When these stocks are built, however, the 'risk premium' should progressively disappear, as markets cannot remain in a state of excess supply forever. The outlook for gold has improved considerably given recent events, and prices are likely to reflect a geopolitical risk premium, underpinned by inflation worries and concerns over sovereign risk. However, silver is the preferred choice of investors and likely to remain so. Industrial metals should find support from Q211 peak seasonal demand. Geopolitical risk has become the latest threat to global growth and is continuing to spread, raising the specter of rising inflation and receding growth. The safe-haven bid for gold has returned in force as tensions intensify in the Middle East and North Africa. Markets are beginning to price a shift of contagion from North Africa to some of the Gulf economies, principally Bahrain. With the MENA region a significant crude-oil producer, energy prices are likely to remain elevated for longer, and higher inflation is positive for gold. Concerns over sovereign risk have resurfaced and there is a growing acceptance by investors that the eurozone debt crisis will get worse before it gets better and that this also will be gold-positive. However, gold is also a risky asset that is likely to suffer bouts of heavy selling from time to time, while falls in equity and other commodity markets could force investors to sell gold to cover margin calls. Corrections within the strong uptrend though are good opportunities to buy, in our view, as the case for gold to reach $1,550-1,600/oz has been considerably bolstered by recent events. Silver has continued to outperform gold; the gold: silver ratio has fallen below 40 for the first time since February 1998. Investors appear to be favoring silver in relation to gold because it is a precious metal (has all the attributes of gold but is much cheaper), a supply-constrained commodity (market is in backwardation) and an industrial metal. In short, silver is seen as being in a win
