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Is the Cold War Heating Up (and How Would

it Affect Your Wallet)?

By Sasha Cekerevac for Investment Contrarians | Oct 16, 20120

Having been relegated to the history books, the Cold War between the West and the East appears

to be heating up again. On one side, we have increasing tensions with China; U.S. politicians

claim that China is a currency-manipulator and China has massively increased its spending in

defense, which is threatening the security in that part of the world. If we look to the Middle East,

tensions are now rising with Russia.

Market sentiment has always been wary of the Middle East in relation to oil prices, partly

because of the level of supplies generated within that region, and partly because of the traffic

routes for transporting oil around the world. Oil prices are extremely sensitive to any disruption

to either supply or transportation routes, as the world is increasingly run on just-in-time

deliveries. Any disruption will certainly cause massive spikes in oil prices and volatility in

market sentiment.

The recent hostilities between Turkey and Syria are now putting U.S.–Russian relations in the

spotlight. Essentially, America is supporting the Syrian rebels and looking to oust their leader,

believing this will free the Syrian people of the tyrant. Russia has been a long-term supporter of

Syria, and has continued to provide military weapons to suppress the uprising.

In a recent interview in German newspaper Der Spiegel, Vladimir Yukanin, who is a close

confidant of Russian President Vladimir Putin, made some remarks that certainly will affect

market sentiment. (Source: “Russia and the West are Drifting Apart,” Der Spiegel, October 11,

2012.)

While Yukanin states that there are many common problems between Russia and America, he

was extremely critical of U.S. support in the region. He stated that people in the Middle East

don’t want to be dominated by Western nations, as he said the failed attempts by the Soviet

Union didn’t work; he doesn’t believe promoting democracy in the region will be any better. He

also hinted that the West is hypocritical in promoting democracy, as evidenced by U.S. support

of Saudi Arabia, which clearly is not a democratic state.

The most worrying statement was his comment, “Russia and the West are drifting apart.” This

cannot be seen as helping oil prices remain stable. Market sentiment will continue to be on the

edge, as developments in the Middle East shift with each new uprising or revolt.

With such tight supply lines and limited ability for other nations to increase production, oil prices

will be at the mercy of any escalation in Middle Eastern violence. While we certainly can’t

change anyone’s opinion regarding foreign policy, we can be aware of shifts in market

sentiment. I would closely watch any news of increased tensions, as the Turkish–Syrian

hostilities could break out into full war. A war between Turkey and Syria could spark a larger

regional battle that would be extremely dangerous for oil prices, not to mention an attack on Iran

by Israel.

Chart courtesy of www.StockCharts.com

Brent Crude oil prices are the standard for international markets. The massive volatility in oil

prices, which included a bottom in late June, has been followed with a retracement over half of

the decline. With oil prices hitting just above their 200-day moving average (MA), we would

need to see a break above the high in September for a retest of the year’s highs. Market

sentiment is now clearly looking at oil prices to potentially move up if hostilities break out.

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