We Americans take a casual attitude to history. If we want to say something has become irrelevant or unimportant, we say "it's history." Middle Easterners, by contrast, take their history very seriously. For example, when Bin Laden issued a statement comparing President Bush to "Hülegü," U.S. intelligence analysts didn't have a clue what he was talking about. They had to scramble researchers to figure out the reference to Genghis Khan's grandson. But average Arabs, even those without secondary education, immediately understood the comparison. We need to remember this strong connection with history when we explore the implications of the recent deal with Iran.
In its feckless handling of Syria and in the P5+1 deal, the Obama administration has unwittingly blundered into forces of history it is clearly ignorant of. As a result, the region faces the greatest crisis since, um, Hülegü.
We won't go into all details of the deal here. Suffice it to say, the P5+1 offered valuable concessions to Iran in exchange for less than nothing. By less than nothing, we mean this deal actually walks back from previous U.N. security council resolutions that called for Iran to halt all Uranium enrichment; it explicitly allows Iran to continue enrichment. While it requires Iran to turn its 20% enriched Uranium into oxide, the process is reversible so the requirement is toothless. For all the P5+1 concessions, the "breakout time" for Iran to produce a bomb has not been dented.
Not only Israel, but all the other countries in the region, have long hoped that the U.S. would restrain Iran's nuclear ambitions. Those hopes now look fruitless. This combined with the pusillanimous handling of Syria has convinced these countries that they're going to have to go it on their own.
Most Americans think of Middle Eastern politics in terms of the Israeli-Arab conflict. However, from a broad historical perspective, this conflict is inconsequential in both magnitude and duration. Israel comprises less land than Vancouver Island and less than 2% of the region's population. For 1300 years Jews, as "people of the book," enjoyed a protected (albeit inferior) status under Islam. Violent conflict between Arabs and Jews is a 60-year blip in a very long timeline.
By contrast, Arab-Persian conflict has a very long and bitter history. In everyday conversation, both sides still refer to the battle of Qadisiyyah, where Arab Muslim armies crushed the Persians 1400 years ago. Ferdowsi, a tenth-century poet, who is studied in school and revered as a national symbol in Iran, made Arabs the villains of his epic, writing:
Damn this world, damn this time, damn this fate,
That uncivilized Arabs have come to make me Muslim.
This enmity continues to modern times-- for example when Iranian Hajis decapitated Saudi policemen, parading the heads on poles; when Iran attempted to assasinate Saudi Arabia's ambassador to the U.S.; or when King Abdullah called Iran a snake and urged the U.S. to cut its head off. Iran has even launched a campaign to "de-arabacise" the Farsi language.
Implication One: Saudi Arabia Keeps The Oil Spigot Turned Up
Saudi Arabia and the Gulf countries have recently ramped up their oil production close to the highest levels of all time.
While there has been a need to offset the shortfall from lost Libyan production, there is also an indication that Saudi Arabia is trying to lower prices to pressure Iran. We expect that to continue until the Iranian nuclear threat is removed.
Implication Two: Qanbalatayn (Two Bombs)
Knowing the history, you'll understand why Saudi Arabia feels the need to acquire nuclear weapons capabilities to match or exceed Iran's. Of course, Saudi Arabia needn't go far to get weapons. Having financed Pakistan's own nuclear weapons program, it already has a few bombs and ballistic missiles set aside for it. If Implication Three doesn't come about, the region is likely to see a dangerous, multi-lateral arms race.
Implication Three: Sunni States May Support An Israeli Attack
The major Arab powers have been alarmed by Iran's increasing belligerence and rapid strides toward nuclear weapons capability. Whatever Israel's symbolic significance, the Arab countries know that it will never be an existential threat to them. They're not so sure about Iran. For all the rhetoric against the "Zionist Entity," it's the Shi'a Entity that really worries them.
As one who follows Arab newspapers, I've seen a shift in focus. While there is still no love for Israel, there is much more talk of Iranian and Shia irredentism. The line on Israel has softened, if only a little. Prince Al-Waleed, who is known as a human trial balloon for the Saudi leadership, has been broadcasting that Israel and Saudi Arabia now share some interests. And there are other stories about Saudi rapprochement with Israel, including accounts of the IDF visiting Saudi airbases as possible staging areas to attack Iran.
While it may sound improbable for hard-line Sunni states to work with Israel, it really isn't. For a Sunni fundamentalist, it's easy to make a theological case for working with "people of the book" against the Shi'a, who many consider to be apostates (which is much worse than being an infidel).
One of the brakes for an Israeli attack on Iranian nuclear facilities has been the risk of it spiraling into a broader "Islam vs. the West" conflict. That is one of the reasons Israel has sought U.S. approval for an attack thus far. With many of the Sunni Arab states supporting action against Iran, if only tacitly, that brake may now be gone. Does Israel really need U.S. approval for an action that other countries in the region support?
Summary And Investment Implications
The bottom-line is that we see oil moving briefly lower as the Arab states continue to crank up production to pressure Iran. But the risks of an attack on Iranian nuclear sites and an Iranian reprisal are greater now than they have ever been. The oil market may already be recognizing that with Brent crude recovering nearly all of the 3% it lost when the deal was announced. The potential for a massive spike in oil prices in the next 6-12 months has grown dramatically.
As noted previously, we bought puts on oil futures in back August when the Syrian crisis began. we have been selling the Puts back and will be shifting to a long oil position on further weakness. We prefer to use Futures and Futures Options for this trade. However, a similar trade can be made with the United State Oil Fund (USO), iPath Oil Total Return ETF (OIL), ProShares Ultra DJ-AIG Crude Oil (UCO), and PowerShares DB Oil Fund (DBO). Note that these ETFs may be subject to futures roll and leveraged ETF decay.
Additional disclosure: I am long oil futures Puts but am shifting to a long position in oil futures Calls