Of all the traded commodities, oil (black gold) is the most intriguing. Wars are fought over this commodity, courses of national and international politics change abruptly over oil. As any oil trader worth his barrel would know, oil prices have three kinds of premium built into it - speculative, political and terror. Needless to say, political and terror premia need special skills to gauge. As an oil trader, I have to monitor OPEC meetings, IEA releases, statements of diverse personalities like Chekib Khelil, Shokri Ghanem, Ramirez and Ali Al Nuaimi. This is in addition to Somalian pirates, President Hugo Chavez, Col. Gaddafi, the Nigerian rebels and Lukos. Ofcourse the US non strategic petroleum reserves impact oil prices too, but marginally. Oil remains something of a hippie commodity, wild and volatile. Now one more personality debuts on the global oil stage - Muqtada Al Sadr. Oil traders like me are taking notice. Weekend chatrooms are buzzing and so is the beta (volatility) on Crude Oil.

As per media reports, Muqtada Al-Sadr (firebrand Shia cleric and chief of the feared "mehdi" army) is back in Iraq and is gunning for a mainstream political role in future Iraqi elections, even as the US draws a withdrawal plan. Note his periodic press statements and note how oil markets react in predictable manner. Iraq by the way, has plans to pump 12 Mn barrels / day (~ 25 % of OPECs total output) by 2012 and be one of the primary "oil price swing" producer nations (capability to significantly impact oil prices by tweaking it's output). Al Sadr's political leanings are heavily tilted towards Iran's shi'ite clergy and therefore, by default, anti west. Muqtada has made no bones about the fact that Iraq must be ruled by Shias (Saddam was a Sunni) who are a majority and that he is prepared to shoulder the responsibility of a national leader. He has made it even more clear that any Iraqi leader who rules Iraq must (or will) rule with an iron hand. His ideology is hardline and un-relenting.

With the US having had to shoulder the responsibility to oversee and supervise repair / upgrade Iraqi oil wells after the 2003 invasion as Saddam Hussein's Republican guards set the wells afire, most Iraqi oil wells will have modernised to out perform their peer Arab producers who boast of decades old extraction technology & equipment. Iraq's position as a future oil price swing nation is almost assured. Any seasoned oil trader will know that major upgrades to oil wells and extraction hardware can only be achieved after extended shutdowns and loss of revenues. The OPEC members are busy falling over themselves in a mad scramble to pump over and above their allocated quota to earn petro dollars. In a perverse and bizzare world of oil, OPEC allocates quotas to member nations not on proven reserves but on claimed reserves ! Naturally, every nation is in a hurry to announce "revised reserves". While many sanguine voices have expressed concerns about over supplying the market, it takes only one member to exceed the quota to break the price cartel. I feel a strong personality is maybe what will take the price fixing cartel to succeed, much to the chagrin of the oil consuming world. That such a person should also command the power of a price swing producer, will be an additional positive. Muqtada Al Sadr, if he ascends to power will have all the ingredients at his disposal to be such a personality. With a high quality crude reserve in Iraqi territory at his disposal, he can potentially brandish the "oil sword" at the western world ("Oil sword" was a term coined in 1973 after the Arabs forced an oil emargo on the west in protest against Israel). While the impact of his actions may appear limited as of now, the permutations and combinations of what may occur when he comes to power are mind boggling. That he is close to Iran is a given. That Iran has been attempting to put in place a modern oil bourse is a well known fact. That they want payments to be made in "any but the US dollar" is also well known. If Muqtada hitches his wagon to Irans star, oil can be on the boil again. It can lead to geo political stress that will make the Korean imbroglio look like a walk in the park. Currencies will go into a tizzy and fiscal deficits will soar into the stratosphere. Oil above USD 120 / barrel levels is any governments worst nightmare come true.

If Al Sadr has his way, these developments are likely to make the coming future challenging for oil consuming / import dependent nations. Watch the man closely in the coming years.

I write this piece not against / in favour of any political / religious ideology but as a commodity watcher.

Vijay L Bhambwani
Ceo - BSPLindia.com